LIBRARY 

OF  THE 

University  of  California. 


GIFT    OF 


..V 


J  Class^ 


jiMj-. 


kn  13 1911 


CURRENT 
RAILWAY 
PROBLEMS 

SAMUEL  O.  DUNN 


OF  THE 

UNIVERSiTY 

OF 

^£4LrFo'M2i^ 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/currentrailwayprOOdunnrich 


CURRENT 
RAILWAY  PROBLEMS 


By 


SAMUEL  O.  DUNN 

Editorial   Director 
Railway  Age  Gazette 


WITH    THE    COMPLIMENTS 
OF   THE    PUBLISHER 


Published  by  the 
Railway   Age   Gazette 
1911 


'Jj-//iM^-' 


CONTENTS 


Valuation   of  Railways,   with   Especial   Reference 
to  the  Physical  Valuation  in  Minnesota 5 


Shall  Railway  Profits  be  Limited? 39 


Railway  Rates  and  Railway  Efficiency 59 


The  New  Long  and  Short  Haul  Law 69 


218549 


,.^^ 


VALUATION   OF  RAILWAYS,  WITH  ESPE- 
CIAL REFERENCE  TO  THE  PHYSICAL 
VALUATION  IN  MINNESOTA.^ 

During  recent  years  there  has  been  much  discussion  of 
valuation  of  the  physical  properties  of  railways  as  a  basis 
for  public  regulation  of  their  rates.  The  subject  has  been 
moved  a  good  way  from  the  field  of  academic  theory  to 
that  of  applied  theory  by  the  exhaustive  physical  valuation 
of  the  railways  of  Minnesota  which  recently  was  completed 
by  the  railway  commission  of  that  state. 

There  were  "physical  valuations"  before  that  in  Minnesota, 
notably  that  in  Texas  in  1894;  that  in  Michigan  in  1900;  and 
that  in  Wisconsin  in  1903.  But  the  valuation  in  Texas  re- 
cently was  admitted  by  the  engineer  who  made  it  to  be  en- 
tirely out  of  date;  and  it  never  was  entitled  to  much  respect.* 
None  of  these  valuations  was  so  exhaustive  as  that  in  Min- 
nesota, and  those  in  Michigan  and  Wisconsin  were  made  as 

^  An  article  by  the  writer  having  the  above  title  was  published  in 
the  Journal  of  Political  Economy  in  April,  1909.  In  view  of  subsequent 
developments  regarding  the  question  of  valuation  of  railways  it  has 
seemed  worth  while  to  make  substantial  additions  to  it.  The  additional 
matter  is  enclosed  in  brackets.  The  article  is  here  reprinted  by 
permission. 

-  "Doubtless  many  of  them  (the  railways)  are  now  considerably  un- 
dervalued by  the  commission.  The  valuations  now  in  use  were  made 
in  1894-6  when  land,  rights  of  way,  terminal  facilities  and  construction 
materials  were  at  their  lowest  value.  In  addition,  the  commission  has 
not  given  the  roads  any  credit  for  the  permanent  improvements  made 
by  them,  the  general  settling  and  seasoning  of  the  properties,  or  the 
advance  in  value  due  to  the  general  growth  of  the  community.  If  a 
thorough  revaluation  were  made  by  the  commission  it  is  believed  that 
the  margin  between  actual  value  and  capitalized  value  would  be  wiped 
out  in  the  case  of  many  roads." — "Railroad  Transportation  in  Texas," 
by  Charles  S.  Potts,  Adjunct  Professor  of  Law  and  Government,  Uni- 
versity of  Texas;  page  155. 


6  /.  Cyi}R^N-T-RAItWAV -.PROBLEMS. 

bases  for  taxation,  not  rate-regulation.  The  Railroad  Com- 
mission of  Washington  finished  a  physical  valuation  of  the 
railways  in  that  state  for  purposes  of  state-regulation  at 
about  the  same  time  that  the  Minnesota  commission  com- 
pleted its  work.  But  the  valuation  in  Washington  relates 
to  only  a  few  roads,  built  and  operated  under  somewhat  un- 
usual conditions,  while  the  Minnesota  valuation  relates  to 
nineteen  carrying  and  six  switching,  or  terminal,  roads,  hav- 
ing an  aggregate  line-mileage  of  7,596  miles  and  an  aggregate 
track-mileage  of  10,438  miles,  built  and  operated  under  phy- 
sical and  commercial  conditions  similar  to  those  in  a  large 
part  of  the  country.  On  the  whole,  it  is  believed  that  the 
valuation  in  Minnesota  affords  the  best  materials  in  ex- 
istence for  what  may  perhaps  fittingly  be  termed  a  "concrete" 
study  of  valuation  as  a  basis  for  rate-regulation. 

A  brief  study  of  this  sort  will  be  attempted  in  this  article. 
I  shall  try,  first,  to  describe,  and,  second,  to  discuss  the 
method  and  results  of  the  valuation  in  Minnesota;  third,  to 
outline  the  only  method  of  valuation  that,  it  seems  to  me, 
finally  will  stand  the  scrutiny  of  enlightened  economists  or 
of  the  Supreme  Court  of  the  United  States;  and,  fourth,  to 
indicate  in  what  ways,  and  to  what  extent,  a  fair  and  legal 
valuation  could  advantageously  be  used  as  a  basis  for  rate- 
regulation. 

[The  foregoing  did  not  do  entire  justice  to  the  valuation 
in  Washington.  The  commission  of  that  state  decided  that, 
as  is  contended  later  in  this  article,  a  valuation  for  rate- 
making  purposes  must,  to  comply  with  the  decision  of  the 
federal  supreme  court  in  the  Nebraska  rate  case,  take  ac- 
count not  only  of  the  value  of  the  physical  property  of  a 
railway,  but  of  all  elements  that  enter  into  its  value  as  a 
going  concern.  For  a  description  of  the  method  used,  see 
an  article  by  J.  C.  Lawrence,  a  member  of  the  commission, 
in  the  Raihvay  Age  Gazette,  February  18,  1910,  page  359.] 


I. 

The  plan  of  the  Minnesota  commission  contemplated  a  valu- 
ation based  solely  on  the  original  cost  of  construction  and 
the  estimated  cost  of  reproduction  of  the  physical  properties. 
Mr.  Dwight  C.  Morgan,  an  engineer  of  experience  and  ability, 
was  employed  to  take  direct  charge  of  the  work.  Mr.  Morgan 
found  that  records  to  show  the  original  cost  of  the  older  and 
more  important  lines  were  not  available.  The  valuation  made 
is,  therefore,  based  solely  on  the  estimated  cost  of  reproduc- 
tion of  the  physical  properties,  new,  and  also  in  their  present 
condition. 

[In  other  words,  the  commission  started  with  the  premises 
(1)  that  the  value  of  the  railway  was  merely  the  value  of  its 
physical  properties:  (2)  that  the  value  of  the  physical  prop- 
erties was  what  it  would  cost  to  reproduce  them;  and  (3) 
that  rates  should  be  so  regulated  as  to  limit  the  roads  to  a 
"fair  return"  on  this  cost,  or  value.  The  words  ''cost"  and 
"value,"  it  will  be  noted,  were  used  as  synonymous  and  inter- 
changeable, although  they  certainly  are  not  so  used  in  any 
other  practical  business  affairs  whatever.  Nor  are  they 
synonymous  by  any  definition  of  the  technical  economists.] 

A  meeting  of  the  members  of  the  commission  and  its 
engineers  with  railway  officers  representing  95  per  cent  of 
the  mileage  in  Minnesota  was  held  on  January  26,  1906,  and 
a  plan  of  co-operation  agreed  upon.  The  wages  and  prices 
actually  paid  in  1905  were  adopted  as  unit  costs  of  labor  and 
materials.  A  subsequent  review  showed  that  the  wages  and 
prices  of  that  year  were  about  the  average  for  the  five-year 
period,  1902-7,  and  the  valuation  was  made  as  of  June  30, 
1907. 

The  railways  were  supplied  with  blanks  prepared  by  the 
commission  on  which  to  enter,  with  estimates  of  their  cost  of 
reproduction,  all  the  multitudinous  items  composing  their 
physical  properties,  from  land  for  right-of-way,  yards  and 


8  CURRENT   RAILWAY   PROBLEMS. 

terminals  to  locomotives  and  fish-plates;  from  the  brick  in 
the  large  passenger  stations  in  Minneapolis  and  St.  Paul  to 
the  smallest  shop  tools;  from  the  draw-spans  in  the  bridge 
across  the  Mississippi  river  to  the  timber  in  culverts.  A  com- 
plete set  of  blanks  was  filled  out  for  each  100  miles  of  main 
line;  branches  were  treated  according  to  their  special  con- 
ditions. 

After  the  blanks  were  filled  out  and  returned  by  the  rail- 
ways, representatives  of  the  commission  checked  them  by  a 
thorough  and  elaborate  method. 

The  railways  provided  a  special  train,  consisting  of  a  loco- 
motive and  business  car,  for  which  the  state  paid  the  actual 
running-cost.  One  or  more  members  of  the  commission  and 
two  of  its  engineers,  accompanied  by  general  or  division  offi- 
cers of  the  road  on  whose  line  the  train  happened  to  be,  went 
in  this  train  over  each  road.  The  detailed  reports  of  the  road 
were  taken  along.  The  train  moved  slowly  to  permit  con- 
stant observations  of  the  character  and  standards-  of  con- 
struction and  maintenance.  Frequent  stops  were  made,  often 
once  in  a  mile,  usually  once  in  two  miles,  sometimes  only 
once  in  five  miles,  when  the  party  got  out,  and  the  commis- 
sion's engineers  ascertained  the  amount  and  nature  of  the 
ballast  for  some  distance  along  the  roadway,  the  depth  and 
character  of  cuts  and  fills,  the  weight  and  age  of  rails  and 
fastenings,  the  number  of  ties  per  mile,  etc.  The  facts  found 
were  constantly  compared  with  the  reports  of  the  railways, 
and  noted  in  the  engineers'  field-books.  The  terminals  in 
Minneapolis,  St.  Paul  and  Duluth  were  examined  foot  by 
foot.  Stations,  shops,  cattle-pens,  etc.,  were  investigated,  and 
the  railways'  reports  about  them  checked  with  the  same 
thoroughness. 

Rolling  stock  used  on  interstate  roads  was  appraised  on  a 
mileage  basis,  it  being  assumed  that  the  standards  of  each 
interstate  road  were  about  the  same  for  its  entire  line  as  they 
were  in  Minnesota. 

To  ascertain  the  cost  of  reproduction  of  land  used  for 


VALUATION   OF  RAILWAYS.  9 

right-of-way,  yards  and  terminals,  the  commission  sent 
special  agents  throughout  the  state,  who  examined  the  official 
county  records  to  find  what  prices  had  been  brought  by  land 
that  had  been  sold  since  January  1,  1900,  within  one  and  one- 
half  miles  of  any  railway.  Particular  pains  were  taken  to 
find  what  railways  had  paid  for  land  for  railway  purposes 
subsequent  to  the  date  named.  In  reaching  a  determination 
of  the  true  value  of  lands  adjacent  to  railways  records  of 
55,000  bona-fide  sales,  aggregating  1,300,000  acres  and  in- 
volving considerations  approximating  $100,000,000  were  used. 
Records  also  were  used  of  bona-fide  sales  of  land  to  recently 
built  railway  lines,  aggregating  7,000  acres,  located  in  various 
parts  of  the  state,  and  involving  considerations  amounting  to 
$4,200,000. 

The  investigations  of  the  commission  showed  that  it  cost 
an  average  of  about  three  times  as  much  to  get  land  for  rail- 
way right-of-way,  exclusive  of  the  terminals  at  St.  Paul,  Min- 
neapolis and  Duluth,  as  to  get  it  for  other  purposes.  It 
was  found  that  to  get  land  in  St.  Paul  for  terminals  cost  an 
average  of  one  and  three-fourths  times  as  much  as  to  get  it 
for  other  purposes ;  in  Minneapolis,  one  and  three-fifths  times 
as  much;  and  in  Duluth,  one  and  one- fourth  times  as  much. 
It  was  also  found  that  where  a  railway  bought  land  by  agree- 
ment it  usually  acquired  it  cheaper  than  where  it  got  it  by  the 
exercise  of  the  power  of  eminent  domain  through  condemnation 
proceedings. 

[As  has  already  been  remarked,  one  of  the  premises  of  the 
commission  was,  and  one  of  the  premises  in  most  arguments 
for  "physical  valuation"  is,  that  "cost  of  physical  production" 
and  "value"  as  applied  to  a  railway  are  synonymous  terms; 
and  it  may  seem  as  if  it  would  be  very  easy,  if  this  assumption 
be  correct,  for  engineers  to  find  the  "value"  of  a  railway. 
But  important  differences  arose  between  the  commission's 
engineers  and  those  of  the  railways  as  to  how  even  the  cost 
of  reproduction  should  be  ascertained.] 

There   was   a   sharp   cleavage   of   opinion    (for   example) 


10  CURRENT   RAILWAY   PROBLEMS. 

between  the  commission  and  the  officers  of  the  railways  over 
the  basis  on  which  land  used  for  right-of-way,  yards  and 
terminals  should  be  appraised.  The  railway  officers  con- 
tended that  the  valuation  should  be  based  on  what  the  data 
collected  showed  it  would  cost  now  to  acquire  the  land  for 
railway  purposes.  The  commission  contended  that  it  should 
be  based  on  what  it  would  cost  now  to  acquire  the  land  for 
other-than-railway  purposes.  In  other  words,  the  commis- 
sion's view  was  that  if  farm  lands  were  worth  $100  per  acre, 
adjacent  railway  right-of-way  should  be  appraised  at  $100 
per  acre,  not  at  $300  per  acre,  the  price  that  the  data  col- 
lected showed  it  probably  would  cost  now  to  get  it  for  railway 
right-of-way  if  it  were  unoccupied.  The  result  of  this  differ- 
ence of  opinion  was  that  the  commission  made  two  ap- 
praisals, "Estimate  A"  and  "Estimate  B."  In  "Estimate  A" 
it  appraised  railway  land  on  the  basis  of  what  it  would  cost 
to  get  it  now  for  railway  purposes.  In  "Estimate  B"  it 
appraised  it  at  what  it  would  cost  to  get  it  for  other-than-rail- 
way purposes.  In  "Estimate  B"  it  also  omitted  any  allowance 
for  solidification  and  adaptation  of  roadbed. 

Railway  engineers  usually  add  10  per  cent  to  their  estimates 
of  the  cost  of  projected  lines  for  "contingencies."  As  he  was 
valuing  lines  already  built,  Mr.  Morgan  thought  an  allowance 
of  5  per  cent  would  be  enough.  He  allowed  for  interest  dur- 
ing construction  at  the  rate  of  4  per  cent. 

The  railways  were  asked  to  furnish  estimates  not  only  of 
the  "cost  of  the  reproduction,  new"  of  their  properties,  but 
also,  making  an  allowance  for  depreciation  due  to  wear  and 
tear,  to  estimate  their  "present  value."  This,  with  a  few  ex- 
ceptions, they  did  not  do,  because  there  was  no  unanimity 
among  railway  officials  as  to  the  elements  proper  to  be  con- 
sidered in  making  up  an  estimate  of  present  value.  The 
officers  of  some  of  the  lines  contended  that,  as  their  proper- 
ties were  well  maintained,  there  was  no  depreciation  to  be 
allowed  for;  that  seasoned  properties  were  more  valuable 
than  new. 


VALUATION   OF  RAILWAYS.  11 

The  Minnesota  proportion  (on  a  mileage  basis)  of  the 
capitalization  of  the  nineteen  carrying  railways  in  that  state 
is  $334,979,692.  The  aggregate  capitalization  of  the  six 
switching  or  terminal  railways  in  the  state,  with  a  line  mileage 
of  18.7  miles,  is  $8,003,000,  making  an  aggregate  capitalization 
for  all  the  mileage  in  the  state  of  $342,982,692,  or  $45,153  per 
mile.  The  railways  estimated  the  total  cost  of  reproduction, 
new,  of  their  physical  properties,  as  of  June  30,  1906,  at 
$500,675,780,  or  $65,909  per  mile.  The  commission's  estimates 
(as  of  June  30,  1907)  compare  with  the  foregoing  figures  as 
follows : 

Estimate  A. — Cost  of  reproduction,  new,  all  lines,  $411,- 
735,195,  or  $54,204  per  mile;  present  value,  all  lines,  $360,- 
480,161,  or  $47,457  per  mile.  Cost  of  reproduction,  new,  19 
carrying  lines,  $397,299,471,  or  $52,430  per  mile;  present  value, 
19  carrying  lines,  $347,051,336,  or  $45,799  per  mile.  Cost  of 
reproduction,  new,  6  switching  lines,  $14,435,724,  or  $770,933 
per  mile;  present  value,  6  switching  lines,  $13,428,824,  or 
$717,160  per  mile. 

Estimate  B. — Cost  of  reproduction,  new,  all  lines,  $373,820,- 
141;  omitting  allowance  for  adaptation  and  solidification  of 
roadbed,  $360,961,548,  or  $47,520  per  mile;  present  value,  all 
lines,  $322,565,107;  omitting  allowance  for  solidification  and 
adaptation,  $309,706,514,  or  $40,772  per  mile.  Cost  of  repro- 
duction, new,  carrying  lines,  omitting  allowance  for  solidifica- 
tion and  adaptation,  $350,106,321,  or  $46,202  per  mile;  present 
value,  $299,858,186,  or  $39,571  per  mile.  Cost  of  reproduction, 
new,  switching  roads,  omitting  allowance  for  solidification  and 
adaptation,  $10,855,227,  or  $579,718  per  mile;  present  value, 
$9,848,327,  or  $525,945  per  mile. 

It  will  be  noted  that  the  average  capitalization  of  all  lines, 
$45,153  per  mile,  is  less  than  the  average  valuation  per  mile 
upon  any  of  the  bases  except  "Estimate  B,  present  value," 
omitting  allowance  for  adaptation  and  solidification  of  road- 
bed. It  should  also  be  remarked  that  over  $37,000,000  of  the 
difference  between  "Estimates  A"  and  "B"  is  due  to  the  fact 


12  CURRENT   RAILWAY   PROBLEMS. 

that  in  "Estimate  A"  land  is  appraised  on  the  basis  of  its  cost 
of  reproduction  for  railway  purposes,  while  in  "Estimate  B" 
it  is  appraised  on  the  basis  of  its  cost  of  reproduction  for 
other-than-railway  purposes.  The  commission,  as  already  in- 
dicated, regards  the  latter  as  the  correct  basis  for  valuation. 


11. 

The  Minnesota  valuation  raises  several  questions  regarding 
the  factors  that  should  enter  into  an  estimate  of  the  cost  of 
reproduction  of  the  physical  properties  of  a  railway.  Space 
will  permit  of  reference  to  only  the  most  important.  The 
commission  and  its  engineers  held  that  owing  to  depreciation 
in  the  value  of  equipment,  rails,  etc.,  the  "present  value"  of 
the  properties  was  less  than  their  "cost  of  reproduction,  new." 
The  officers  of  some  of  the  railways  contended  that  such  de- 
preciation, if  any,  was  offset  by  appreciation  in  value  of  the 
property  due  to  seasoning.  There  is  some  ground  for  both 
of  these  contentions.  A  rail,  a  car,  a  locomotive,  loses  in 
market  value,  becomes  "second  hand,"  the  moment  it  is  put  in 
service;  and  it  gradually  w^ears  out  or  becomes  obsolete. 
For  this  reason  there  should  be  some  deduction  for  deprecia- 
tion. But  the  roadway  of  a  new  railway  appreciates  in  value 
for  a  number  of  years  owing  to  what  the  commission  called 
"adaptation  and  solidification."  How  railway  engineers  and 
operatives  regard  the  matter  is  illustrated  by  the  fact  that  the 
Chicago,  Milwaukee  &  St.  Paul  began  running  through 
freight  trains  over  its  Pacific  coast  extension  in  July,  1909, 
but  would  not  let  even  the  large  prospective  travel  to  the 
Alaska- Yukon-Pacific  Exposition  at  Seattle  tempt  it  to  begin 
running  through  passenger  trains  over  the  extension  until 
July,  1910.  It  was  felt  that  the  line  would  not  be  safe  for 
fast  trains  until  then. 

[The  St.  Paul  did  not  even  begin  running  fast  through 
passenger  trains  on  its  coast  extension  in  July,  1910,  but  has 
now  postponed  the'  establishment  of  this  service  to  April, 
1911,  which  will  be  almost  two  years  after  the  opening  of  the 
line  for  freight  service.  While  it  is  thus  refraining,  from 
considerations  of  public  expediency,  from  operating  the  line 
to  its  full  capacity,  depreciation  of  the  rails,  ties,  bridges. 


14  CURRENT   RAILWAY   PROBLEMS. 

buildings,  etc.,  is  going  steadily  on.  There  is,  however,  a  limit 
beyond  which  depreciation  of  a  composite  structure  such  as  a 
railway  does  not  go.  Little  by  little  the  various  parts  of  the 
composite  whole  are  being  repaired  and  renewed.  If  these 
repairs  and  renewals  are  made  as  they  should  be  deprecia- 
tion of  these  various  parts  does  not  proceed  beyond,  say,  50 
per  cent  of  the  original  cost.  The  limit  of  depreciation  on  a 
well-managed  railway  is  reached  in  about  five  years.*  After 
that  depreciation  of  some  parts  is  entirely  offset  by  repairs 
and  renewals  of  other  parts.  Meantime,  appreciation  in  the 
value  of  the  physical  property  is  steadily  going  on.  At  this 
moment  the  roadbed  and  embankments  of  the  St.  Paul's  coast 
extension  are  being  solidified;  its  water  courses  are  being 
established;  other  similar  changes  are  taking  place;  and  for 
10  years  after  the  time  of  its  original  construction  its  physical 
property  will  be  increasing  in  value,  not  merely  because  of 
permanent  improvements  representing  the  investment  of  new 
capital,  but  because  of  changes  that  take  place  in  its  track 
due  to  the  operation  of  the  railway  and  to  the  operation  of 
natural  forces  on  it.  Other  things  equal,  merely  because  of 
these  things,  the  physical  plant  of  a  railway  which  is  10  years 
old  or  more  and  has  been  properly  maintained  is  a  better 
transportation  machine  than  the  plant  of  one  that  has  just 
been  finished,  in  spite  of  the  fact  that  the  former  may  be  said 
to  have  undergone  depreciation  and  would  therefore  have  a 
lower  estimated  cost  of  physical  reproduction,  new,  than  the 
latter.] 

Now,  if  there  ought  to  be  a  deduction  from  the  estimated 
cost  of  reproduction,  new,  of  old  roads,  owing  to  depreciation 
of  rails,  rolling  stock,  etc.,  should  there  not  be  an  allowance 
for  appreciation,  due  to  seasoning  of  the  roadbed?  It  would 
seem  there  could  only  be  one  fair  answer.  Yet  the  commis- 
sion not  only  deducts  an  aggregate  of  over  $51,000,000  for  de- 

^  See  an  article  by  Frederic  A.  Delano,  President  of  the  Wabash 
Railroad,  entitled,  "The  Application  of  a  Depreciation  Charge  in  Railway 
Accounting,"   in   the  Journal  of  Political  Economy,   November,    1908. 


VALUATION   OF  RAILWAYS.  15 

preciation,  but  also,  in  "Estimate  B,"  withholds  the  compara- 
tively small  aggregate  allowance  of  $12,858,593  that  is  made  in 
"Estimate  A"  for  "adaptation  and  solidification." 

[The  correctness  and  validity  of  the  valuation  of  the 
Minnesota  commission  has  been  subjected  to  the  test  of  litiga- 
tion in  the  cases  involving  freight  and  passenger  rates  fixed  by 
the  state  legislature  and  the  state  commission.  Charles  E.  Otis, 
who  was  appointed  special  master  in  chancery  by  the  United 
States  Circuit  Court  for  the  district  of  Minnesota  to  hear  these 
cases,  in  his  report  to  the  court  on  September  21,  1910,  takes 
the  position  taken  in  this  article,  viz.,  that  reasonable  allowance 
must  be  made  for  "solidification  of  roadbed,"  in  estimating 
cost  of  reproduction.] 

Another  important  question  is  the  proper  basis  of  valuing 
land  used  for  right-of-way,  yards  and  terminals.  The  com- 
mission found  that  it  always  costs  much  more  to  get  land  for 
railway  purposes  than  it  would  to  get  the  same  land  for  farms, 
or  to  build  residences,  factories  or  office  buildings.  But  it 
says  in  its  report : 

"It  seems  to  us  that  the  term  *cost  of  reproduction*  could 
never  have  been  used  by  the  courts  in  a  sense  that  would 
cause  an  entirely  imaginary  and  artificial  value  to  be  placed 
upon  property  actually  owned  and  in  the  possession  of  the 
railway.  ...  We  are  asked  to  .  .  .  proceed  upon  the  theory 
that  the  land,  although  of  its  present  value,  is  not  in  the  pos- 
session of  the  railway,  and  that  to  acquire  it  it  would  be  neces- 
sary to  pay  this  additional  amount  known  as  the  railway  value. 
The  result  of  this  would  be  that  the  true,  or  market,  value  of 
the  land  would  be  disregarded  and  an  artificial  value  placed 
upon  it,  on  an  hypothesis  that  has  no  existence  in  fact." 

It  seems  to  the  present  writer  that  the  method  the  commis- 
sion favors,  not  the  one  it  opposes,  disregards  the  actual  facts. 
The  question  being  considered  is  what  constitutes  the  "true, 
or  market,  value"  of  land  for  railway  purposes.  Land  has  one 
value  for  farm  purposes;  it  has  another  value  for  city-resi- 


16  CURRENT   RAILWAY   PROBLEMS. 

dence  purposes;  and  another  for  railway  purposes.  Its  value 
today  for  one  of  these  purposes  may  be  $100  per  acre,  and  a 
little  later  $200  or  $300,  and  the  amount  that  it  will  bring  at 
any  given  time  for  the  very  purpose  for  which  it  is  to  be  used 
is  its  value  for  that  specific  purpose.  As  Professor  Mortimer 
E.  Cooley  said  approvingly  in  an  article  regarding  the  physical 
valuation  of  the  railways  in  Michigan  that  was  made  under 
his  supervision:  "The  true  cash  value  of  a  thing  has  been 
defined  as  the  price  upon  which  a  purchaser  and  a  seller  mu- 
tually agree,  and  at  which  a  transfer  actually  takes  place." 
Now,  land  actually  costs  more  for  railway  than  for  other 
purposes  because  (1)  its  acquisition  and  use  for  railway  pur- 
poses involves  damage  to  adjacent  property  not  acquired  that 
must  be  paid  for,  and  (2)  land  that  it  is  learned  is  in  the 
direct  path  of  a  coming  railway,  and  will  be  absolutely  re- 
quired by  it,  attains  a  monopoly  value.  If  land  that  a  farmer 
had  just  bought  for  $100  an  acre  would  have  cost  a  railway 
$300  an  acre,  would  it  be  reasonable  to  say  that  $300  an  acre 
is  its  "true,  or  market,  value"  for  farm  purposes  ?  And,  if  not, 
with  what  fairness  or  reason  can  it  be  argued,  as  the  com- 
mission argues,  that  $100  an  acre,  being  the  value  of  land  for 
farm  purposes,  is  the  "cost  of  reproduction"  or  "true  value"  of 
land  used  for  railway  purposes,  when  the  railway  has  paid  for 
it,  or  would  have  to  pay  for  it  if  it  were  unoccupied,  $300 
an  acre? 

The  commission  doubtless  would  answer  that  if  a  railway 
actually  has  paid  $300  an  acre  it  is  entitled  to  a  fair  return  on 
that  amount  of  investment,  but  that  it  is  not  fair  for  the  exist- 
ing roads  to  earn  a  return  on  any  such  amount,  because  they 
got  most  of  their  land  at  a  price  much  less  than  its  present 
estimated  cost  of  reproduction  for  railway  purposes.  But 
does  the  commission  think  it  unfair  for  a  farmer,  who,  per- 
haps, paid  only  $L25  an  acre  for  his  land,  to  sell  it  now  for 
$100  an  acre,  or  to  earn  a  return  on  its  greatly  increased 
value?  It  probably  would  answer  that  the  railway,  being  a 
public-service  corporation,  has  not  the  same  legal  or  moral 


VALUATION   OF   RAILWAYS.  17 

right  as  the  farmer  to  earn  a  return  on  the  increment  in  the 
value  of  its  land. 

Let  us  examine  this  theory.  Minnesota's  mileage  of  rail- 
ways in  proportion  to  its  area  is  small  compared  with  the 
mileage  of  the  eastern  states.  In  order  to  fill  out  its  large 
dimensions  with  population  and  commerce  its  existing  lines 
must  build  many  new  branches,  and  perhaps  some  entirely 
new  railways  will  have  to  be  constructed.  If  the  state  says 
that  it  will  let  these  new  branches  and  new  lines  earn  a  re- 
turn only  on  the  farm  or  town-lot  value  of  the  land  that  they 
must  buy,  and  not  on  the  three  or  four  times  greater  amount 
that  they  must  pay  for  it  to  get  it  for  railway  purposes,  the 
new  branches  and  new  trunk  lines  are  not  apt  to  be  speedily 
forthcoming.  And  if  it  decides  to  let  new  lines  earn  a  re- 
turn on  what  their  land  actually  costs,  it  cannot  deny  to  ex- 
isting lines  the  opportunity  to  earn  a  return  on  the  probable 
cost  of  reproduction  of  their  land  for  railway  purposes.  For 
the  new  branches  necessarily  will  compete  with  existing 
branches  of  old  lines.  The  new  trunk  line  necessarily  will 
compete  with  the  old  lines.  And,  therefore,  to  hold  down 
the  rates  on  the  old  lines  so  that  they  could  not  earn  a  re- 
turn on  the  total  estimated  cost  of  reproduction  of  their  lands 
for  railway  purposes,  would  necessarily  be  to  hold  down  the 
competitive  rates  of  the  new  lines  so  that  they  could  not 
earn  a  fair  return  on  what  their  land  actually  had  cost;  for 
shippers  at  competitive  points  always  will  ship  by  the  line 
that  makes  the  lowest  rates.  In  that  case,  the  new  lines 
would  either  not  earn  a  fair  return  on  their  investment  in 
land,  or,  in  order  to  earn  a  fair  return,  they  would  have  to 
make  up  by  high  rates  on  business  at  non-competitive  points 
the  losses  they  suffered  on  business  at  competitive  points.  A 
railway  commission  can  hardly  be  imagined  encouraging  rail- 
ways to  pursue  such  a  policy. 

[The  view  expressed  in  this  article,  that  the  proper  basis  of 
valuation  of  real  estate  used  for  railway  right-of-way  and 
terminals  is  what  it  would  cost  the  railway  now  to  acquire  it 


18  CURRENT   RAILWAY   PROBLEMS. 

for  railway  purposes,  and  not  its  value  for  farm  and  other 
purposes,  is  the  view  taken  by  Master  in  Chancery  Otis  in  the 
Minnesota  rate  case.     The  Master  in  his  report  said: 

"The  right  of  eminent  domain  is  given  to  the  company  for 
the  purpose  of  preventing  the  property  owner  from  taking 
advantage  of  the  necessity  of  the  company  as  to  any  particular 
tract.  While  it  is  intended  to  secure  to  him  its  full  and  fair 
value  for  any  purpose  for  which  it  is  best  adapted — and  to 
this  end  an  appeal  is  given  to  the  courts  from  unrighteous 
awards — we  are  not  to  lose  sight  of  the  fact  that  railroads 
must  be  constructed  along  continuous  lines,  and  that  the  to- 
pography of  the  lands  through  which  the  lines  are  projected 
has  much  to  do  with  their  availability  for  railway  purposes, 
and  that  such  availability  necessarily  and  properly  enhances 
their  value,  for  which  the  owner  is  entitled  to  compensation, 
and  so  it  comes  about  that  properties  so  available  and  favorably 
situated  for  the  purpose  have  a  much  greater  value  than  other 
adjoining  or  adjacent  properties  not  so  conditioned." 

It  has  recently  been  contended  that  when  a  valuation  is  be- 
ing made  for  the  purpose  of  rate-regulation,  railways  should 
not  be  credited  with  the  "unearned  increment"  in  their  land. 
It  is  interesting  to  note  that  the  Master  in  the  Minnesota  rate 
case  emphatically  holds  that  the  unearned  increment  must 
be  taken  into  consideration,  and  for  authority,  quotes  the  fol- 
lowing statement  made  by  the  Supreme  Court  of  the  United 
States  in  the  case  of  Wilcox  v.  Consolidated  Gas  Company 
(212  U.  S.  19,  41,  52)  :  "There  must  be  a  fair  return  upon 
the  reasonable  value  of  the  property  at  the  time  it  is  being 
used  for  the  public.  .  .  .  And  we  concur  with  the  court  below 
in  holding  that  the  value  of  the  property  is  to  be  determined 
as  of  the  time  when  the  inquiry  is  made  regarding  the  rates. 
If  the  property  which  legally  enters  into  the  consideration  of 
the  question  of  rates  has  increased  in  value  since  it  was  ac- 
quired, the  company  is  entitled  to  the  benefit  of  such  increase." 

Continuing,  the  Master  says: 

"This  clearly  shows  that  the  company  is  to  share  as  well  as 


VALUATION   OF  RAILWAYS.  19 

the  public  in  the  general  growth  and  prosperity  of  the  coun- 
try. .  .  .  The  roads  under  consideration  were  constructed 
and  completed  many  years  ago,  and  what  may  have  gone  into 
them,  if  it  could  be  determined  with  reasonable  certainty, 
would  not  take  into  consideration  the  changed  condition  of 
the  country  since  their  original  construction.  Its  growth  and 
prosperity — in  which  the  companies  are  entitled  to  share — 
and  by  reason  of  changed  conditions  and  lapse  of  time  it  has 
little  weight  in  arriving  at  present  value."] 

The  tax  board  of  Michigan,  in  valuing  the  roads  of  that 
state  for  taxation,  appraised  railway  land  at  100  to  125  per 
cent  in  excess  of  its  value  for  other  purposes.  The  tax  board 
of  Wisconsin,  in  valuing  the  roads  in  the  state  for  taxation, 
appraised  railway  land  at  150  per  cent,  more  than  its  value 
for  other  purposes.  Can  it  be  that  the  difference  between 
the  bases  of  appraisals  of  land  in  Michigan  and  Wisconsin, 
and  in  Minnesota,  is  due  to  the  fact  that  in  the  former  cases 
foundations  were  being  laid  on  which  to  fix  what  the  rail- 
ways should  pay  to  the  public,  while  in  Minnesota  a  founda- 
tion was  being  laid  on  which  to  fix  what  the  public  should  pay 
to  the  railways?  Such  variances  of  opinion  between  public 
officials  in  such  circumstances  are  not  calculated  to  encourage 
implicit  confidence  in  the  impartiality  of  valuations. 

The  foregoing  reasoning  leads  to  the  conclusion  that  in  a 
fair  physical  valuation  some  deduction  should  be  made  from 
the  cost  of  reproduction,  new,  for  depreciation  of  rails, 
bridges,  equipment,  etc. ;  that,  on  the  other  hand,  some  com- 
pensating addition  should  be  made  for  adaptation  and  solidi- 
fication of  roadbed;  and  that  land  should  be  appraised  on 
the  basis  of  its  estimated  present  cost  of  reproduction  for 
railway  purposes.  If  this  be  correct  the  commission's  "Esti- 
mate A,  Present  Value,"  is  based  on  more  nearly  correct 
economic  principles  than  any  other  of  its  estimates.  Whether 
it  is  accurate  from  an  engineering  point  of  view  could  be  de- 
termined only  by  engineers  familiar  with  each  of  the  railways 
appraised. 


20  CURRENT   RAILWAY   PROBLEMS. 

[Master  in  Chancery  Otis  put  even  higher  valuations  on 
the  railways  directly  involved  in  the  litigation  heretofore  re- 
ferred to  than  the  commission's  "Estimate  A,  Cost  of  Re- 
production, New."  The  following  are  the  commission's  "Es- 
timate A,  Cost  of  Reproduction,  New,"  of  the  Northern  Pa- 
cific, the  Great  Northern  and  the  Minneapolis  &  St.  Louis,  and 
the   Master's   valuations: 

Northern          Great  Minn. 

Pacific.  Northern.  &  St.  L. 

Commission's  estimate ...  $69,397,955  $107,074,102  $16,622,245 

Master's  valuation 90,204,545  138,425,291  21,608,464 

While,  as  already  stated,  the  commission,  in  order  to  ar- 
rive at  the  present  values  of  the  properties,  made  reductions 
from  their  estimated  cost  of  reproduction,  new,  on  account  of 
depreciation,  the  Master  made  his  estimates  entirely  on  the 
basis  of  cost  of  reproduction,  new.     On  this  subject  he  said: 

"A  large  part  of  the  depreciation  is  taken  care  of  by  constant 
repairs,  renewals,  additions  and  replacements,  a  sufficient  sum 
being  annually  set  aside  and  devoted  to  those  purposes,  so 
that  this,  with  appreciation  of  roadbed  and  adaptation  to  the 
needs  of  the  country  and  of  the  public  served,  together  with 
working  capital  hereinafter  mentioned,  fully  offsets  all  de- 
preciation and  renders  the  physical  properties  of  the  roads 
not  less  valuable  than  their  cost  of  reproduction  new.  .  .  . 
There  is  another  element  which  may  properly  be  considered 
in  connection  with  the  question  of  depreciation  and  as  an 
offset  to  it.  It  has  been  necessary  that  the  companies  should 
have  on  call  a  large  sum  of  money  for  the  conduct  of  the 
business  and  to  meet  emergencies.  No  doubt  a  large  part  of 
it  draws  a  low  rate  of  interest  while  on  deposit  in  banks,  but 
it  must  be  that  very  considerable  amounts  are  idle  and  un- 
productive and  must  be  considered  as  an  element  of  value  in 
the  matter  of  rate-making.  In  view  of  all  the  foregoing  con- 
siderations it  follows  without  question  that  there  should  be  no 
deductions  on  account  of  depreciation."] 


III. 

When  a  fair  physical  appraisal  has  been  made  of  what 
worth  will  it  be,  economically  or  legally,  as  a  basis  for  fixing 
rates  ? 

In  the  course  of  his  argument  in  his  report  to  show  that 
the  cost  of  reproduction  of  railway  land  for  railway  purposes 
is  not  the  proper  basis  of  valuation,  Mr.  Morgan,  engineer 
of  the  commission,  says :  "Cost  of  reproduction  and  value  as 
a  utility  have  no  necessary  logical  relation."  If  the  cost  of 
reproduction  of  the  physical  property  for  railway  purposes  has 
no  necessary  relation  to  utility,  can  there  be  any  necessary 
relation  between  its  cost  of  reproduction  for  farm  purposes 
and  its  utility  for  transportation  purposes?  Obviously,  no. 
But  utility  is  one  of  the  elements  and  the  most  important 
element,  in  the  value  of  everything  that  properly  can  be 
regarded  as  capital.  Consequently,  it  would  seem,  there  is 
no  necessary  relation  between  the  cost  of  reproduction  of  the 
physical  property  of  a  railway  and  its  value;  and  an  estimate 
of  the  cost  of  reproduction  of  the  physical  properties  of  the 
railway  is  not  a  true  valuation  of  the  railway  at  all. 

That  the  cost  of  reproduction  of  the  physical  plant  of  a 
railroad  is  an  element  in  its  value  is  clear.  No  one  would 
pay  the  same  for  two  railways  of  the  same  mileage,  having 
the  same  earnings  per  mile,  if  one  had  a  decrepit  physical 
plant  and  the  other  had  a  good  one.  But,  on  the  other  hand, 
no  one  would  pay  the  same  for  two  railways  that  had  equal 
mileage  and  equally  good  plants,  if  one  had  only  half  as  much 
earnings  per  mile  as  the  other. 

[Suppose  that  an  inventory  of  the  physical  assets  of  a  rail- 
road should  show  that  it  would  cost  $30,000  per  mile  to  re- 
produce it  and  that  on  no  rates  it  could  make  could  it  earn 
a  return  on  more  than  $20,000  per  mile.  This  is  by  no  means 
a  supposition  without  any  basis  of  fact.    For  example,  a  road 


22  CURRENT   RAILWAY   PROBLEMS. 

may  have  been  built  at  a  cost  of  $30,000  per  mile  into  a  district 
affording  a  large  lumber  traffic.  In  course  of  time,  if  the 
cutting  of  timber  progresses  rapidly,  the  amount  of  available 
traffic  from  this  source  will  begin  to  decline,  and  the  more 
traffic  there  is  for  the  road  each  year  the  less  there  will  be 
for  it  in  later  years  unless  some  other  source  of  traffic  is  de- 
veloped. If  it  turns  out  that  the  country  is  not  adapted  to 
the  development  of  any  other  industry,  the  time  will  come 
when  the  road  will  be  left  without  any  traffic  at  all.  Then, 
regardless  of  its  cost  of  physical  reproduction,  what  will  its 
value  be?  It  will  be  nothing,  because  the  property  can  earn 
nothing.  The  property  of  a  railroad  is  not  economically  dif- 
ferent from  any  other  kind  of  property.  The  present  value 
of  anything  depends  on  the  highest  practical  use  to  which  it 
can  be  put.  There  are  lots  in  the  residence  districts  of  Chi- 
cago which,  with  the  buildings  on  them,  formerly  had  a  high 
value  because  they  were  situated  where  people  of  large  means 
desired  to  live.  These  districts  have  ceased  to  be  fashionable 
residence  districts  and  the  houses  on  them  are  now  used  for 
boarding  houses.  The  houses  and  lots  together  are  now 
worth  much  less  than  it  would  cost  to  reproduce  them,  simply 
because  under  present  conditions  the  earning  capacity  of  prop- 
erty in  these  particular  districts  has  declined.  A  banker  loan- 
ing money  on  such  property  now  would  not  be  guided  by 
what  it  cost  nor  by  what  it  would  cost  to  reproduce  it,  but 
wholly  by  its  value  based  on  the  rents  which  the  property 
will  yield — in  other  words,  on  its  earning  capacity.  There  are 
publishing  concerns  which  could  be  sold  for  millions  of  dol- 
lars, but  which  have  no  physical  plants  whatever.  They  get 
their  printing,  binding,  etc.,  done  at  outside  printing  plants 
and  their  whole  physical  equipment  consists  of  office  furniture. 
In  what,  then,  does  their  value  consist?  Obviously,  it  con- 
sists only  in  their  earning  capacity,  and  if  through  bad  man- 
agement their  earning  capacity  were  destroyed  they  would  be 
rendered  absolutely  valueless.  On  the  other  hand,  if  their 
physical  equipment  were  destroyed  there  would  be  no  sub- 


VALUATION   OF  RAILWA 

stantial  reduction  at  all  in  their  value.  A  mercB 
a  retail  business  that  can  be  sold  for  $100,000. 
investment  in  the  building  he  occupies  and  in  his 
goods  may  not  exceed  $50,000.  Why  can  he  sell  his  business 
for  $100,000?  Because  its  earning  capacity  gives  it  a  value  of 
$50,000  in  addition  to  the  value  of  $50,000  given  to  it  by 
the  purely  physical  properties.  The  same  reasoning  applies  to 
railways.] 

It  will  be  replied,  perhaps,  that  the  earnings  of  a  railway 
cannot  be  considered  in  making  a  valuation  of  it  as  a  basis 
for  rate-regulation,  because  earnings  depend  on  rates,  and  the 
reasonableness  of  rates  is  the  very  thing  to  be  determined. 
But  earnings  do  not  depend  solely,  or  even  mainly,  on  rates. 
Gross  earnings  depend  both  on  rates  and  on  the  density  and 
nature  of  the  traffic.  Probably  no  two  roads  charging  the 
same  rates  ever  had  the  same  gross  earnings  per  mile,  be- 
cause one  is  almost  sure  to  apply  the  rates  to  a  greater  den- 
sity of  traffic  than  the  other.  Net  earnings  depend  as  much 
on  operating  expenses  as  on  gross  earnings.  Two  roads 
might  have  approximately  the  same  mileage,  rates,  density  and 
nature  of  traffic,  and  gross  earnings,  and  yet  have  very  dif- 
ferent net  earnings,  because  of  differences  in  operating  ex- 
penses. 

The  density  of  traffic,  other  things  equal,  depends  on  the 
skill  that  has  been  used  in  locating  the  property,  in  co-operat- 
ing with  entrepreneurs  in  building  up  industries  on  its  lines, 
in  getting  good  traffic  connections,  etc. 

[A  railway  does  not  get  up  to  its  full  earning  capacity  for 
years  after  its  original  construction  is  completed.  In  fact, 
it  may  be  said  that  a  railway  never  does  get  up  to  its  full 
earning  capacity.  Every  big  railroad  has  a  number  of  high- 
priced  men  who  devote  all  of  their  energy  and  talents  to 
campaigning  and  working  to  obtain  traffic,  not  merely  by  at- 
tracting it  from  other  roads,  but  by  increasing  the  agricul- 
tural productivity  of  the  land  along  their  lines,  discovering 
and  securing  the  development  of  new  mines,  attracting  fac- 


24  CURRENT   RAILWAY   PROBLEMS. 

tories,  etc.  The  difference  between  the  abounding  prosperity 
of  one  line  and  the  bankrupt  condition  of  a  competing  road 
may  be  altogether  due  to  the  fact  that  the  traffic  department 
of  the  one  has  been  energetically  and  skilfully  managed 
while  the  traffic  department  of  the  other  has  not  been  so 
managed.  A  valuation  based  entirely  on  the  cost  of  repro- 
ducing the  properties  of  the  two  roads  would  take  no  account 
of  this.  But  would  not  this  be  entirely  to  ignore  one  of  the 
most  important  factors  in  the  real  value  of  a  railway?] 

Similarly,  low  operating  expenses,  other  things  equal,  indi- 
cate high  operating  skill.  The  road  with  the  greater  density 
of  traffic,  or  the  lower  operating  expenses,  has  more  utility 
for  its  owners  because  it  earns  them  more  clear  money.  It 
has  more  utility  for  the  public  because  it  hauls  more  travelers 
and  goods,  or  handles  an  equal  number  and  amount  at  a 
lower  cost.  Can  there  be  any  question,  then,  that  it  is  a  more 
valuable  property  both  to  the  public  and  to  its  owners  than 
its  competitor  with  an  equally  good  physical  plant  but  a 
smaller  business  and  higher  operating  expenses?  And  since  it 
actually  is  more  valuable,  is  it  not  solemn  nonsense  to  place 
on  it  the  same  "valuation"  as  on  its  competitor? 

The  sum  of  the  costs  of  reproduction  of  a  watch-case,  main- 
spring, jewels,  etc.,  is  the  value  of  a  watch  as  junk,  but  not 
its  value  as  a  watch.  Its  value  as  a  watch  depends  mainly 
on  how  it  will  run.  Similarly,  the  cost  of  reproduction  of  the 
locomotives,  culverts,  fish-plates,  etc.,  of  a  railway  is  not  it's 
value  as  a  railway.  Its  value  as  a  railway  depends  on 
whether  it  is  so  located  and  so  organized  and  operated  as  to  be 
of  great  or  small  utility  to  the  public,  of  great  or  small  profit 
to  its  owners.  Rate-regulation  based  on  physical  valuation 
alone  would  put  a  premium  on  extravagant  construction  and 
operation  and  a  discount  on  skilful  management.  tr^^ 

It  is  believed  that  valuation  of  railways  based  solely  on  the 
cost  of  the  physical  properties  is  as  unsound  legally  as  it  is 
economically.  In  the  case  of  Reagan  v.  Farmers'  Loan  & 
Trust  Co.,  154  U.  S.,  362,  412,  the    Supreme    Court   of   the 


VALUATION   OF  RAILWAYS.  25 

United  States  held  that  a  railway  was  not  necessarily  entitled 
to  earn  a  return  on  its  cost  of  construction,  saying: 

"It  is  unnecessary  to  decide,  and  we  do  not  wish  to  be  un- 
derstood as  laying  down  as  an  absolute  rule,  that  in  every  case 
a  failure  to  produce  some  profit  to  those  who  have  invested 
their  money  in  the  building  of  a  road  is  conclusive  that  the 
tariff  is  unjust  and  unreasonable.  .  .  .  The  construction  may 
have  been  at  a  time  when  material  and  labor  were  at  the  high- 
est price,  so  that  the  actual  cost  far  exceeds  the  present  value ; 
the  road  may  have  been  unwisely  built,  in  localities  where 
there  is  not  sufficient  business  to  sustain  a  road." 

In  such  event  the  road  will  not  be  upheld  in  charging  ex- 
cessive rates  even  to  pay  a  return  on  its  actual  cost.  If  the 
"present  value"  of  the  property  be  less  than  its  "actual  cost" 
the  owners  must  take  the  consequences.  This  would  seem  to 
imply  rather  plainly  that  the  court  regarded  the  value  of  a 
property  as  something  entirely  different  from  its  cost,  and 
that  a  road  is  legally  entitled  to  earn  a  return  on  its  value, 
whether  that  be  less  or  greater  than  its  cost. 

In  Smyth  v.  Ames,  169  U.  S.,  466,  the  Supreme  Court  men- 
tioned the  cost  of  original  construction  and  permanent  im- 
provements, the  cost  of  reproduction,  the  amount  and  market 
value  of  stocks  and  bonds  outstanding,  the  probable  earning 
capacity  of  the  property  under  particular  rates  prescribed  by 
statute,  and  the  sum  required  to  meet  operating  expenses,  as 
factors  to  be  considered.  It  added:  "We  do  not  say  that 
there  may  not  be  other  matters  to  be  regarded  in  estimating 
the  value  of  the  property." 

[It  will  be  noted  that  in  this  case  the  court  referred  to  the 
probable  earning  capacity  of  the  property  under  particular 
rates  prescribed  by  statute,  and  the  sum  required  to  meet  op- 
'^I'ating  expenses.  Now,  the  only  measures  of  the  probable 
earning  capacity  of  the  property  under  particular  rates  are 
the  nature  and  the  density  of  the  traffic.  It  follows  that  these 
things  must  be  considered  in  making  a  valuation.  As  to  op- 
erating expenses,  which  the  court  also  mentioned  as  a  factor 


26  CURRENT   RAILWAY   PROBLEMS. 

to  be  considered,  what  have  they  to  do  with  the  estimated  cost 
of  reproducing  the  physical  plant?  Obviously,  the  only  bear- 
ing they  have  on  the  value  of  the  railway  is  that  the  higher 
they  are,  other  things  equal,  the  less  net  earnings  will  be ;  and 
that  the  lower  they  are,  other  things  equal,  the  more  net  earn- 
ings will  be.  In  other  words,  they  affect  the  value  of  the  prop- 
erty by  affecting  its  capacity  to  earn  profits.] 

The  advocates  of  physical  valuation  seldom  go  back  farther 
in  the  decisions  of  the  Supreme  Court  than  Smyth  v.  Ames. 
But  four  years  before  in  the  case  of  C,  C,  C.  &  St.  L.  Rail- 
way V.  Backus,  154  U.  S.  439,  445,  446,  it  used  the  following 
language : 

"But  the  value  of  property  results  from  the  use  to  which  it 
is  put  and  varies  with  the  profitableness  of  that  use,  present 
and  prospective,  actual  and  anticipated.  There  is  no  pecu- 
niary value  outside  of  that  which  results  from  such  use.  .  .  . 
Will  it  be  said  that  the  taxation  must  be  based  simply  on  the 
cost,  when  never  was  it  held  that  the  cost  of  a  thing  is  the 
test  of  its  value?  Suppose  there  be  two  bridges  over  the 
Ohio,  the  cost  of  the  construction  of  each  being  the  same,  one 
between  Cincinnati  and  Newport,  and  another  20  miles  below 
and  where  there  is  nothing  but  a  small  village  on  either  shore. 
The  value  of  the  one  will,  manifestly,  be  greater  than  that  of 
the  other,  and  that  excess  of  value  will  spring  solely  from  the 
larger  use  of  the  one  than  of  the  other." 

The  meaning  of  the  last  sentence  is  not  changed  by  substi- 
tuting for  the  phrase,  "the  larger  use"  the  phrase,  "the  greater 
density  of  traffic."  The  Backus  case  was  a  tax  case;  but  it  is 
too  obvious  for  dispute  that  what  the  court  said  here  about 
value  applies  equally  to  appraisals  for  taxation  and  for  rate- 
regulation. 

[In  the  very  recent  case  of  the  Missouri,  Kansas  &  Texas 
Railway  Company  v.  Love,  et  al.  (177  Fed.  493,  496,  497), 
Judge  W.  C.  Hook  of  the  United  States  Circuit  Court,  third 
division,  used  language  indicating  that  he  believes  that  not 
merely  the  cost  of  reproducing  the  physical  property  of  a  rail- 


VALUATION   OF  RAILWAYS.  27 

way,  but  its  ability  to  earn  profits  and  to  serve  the  public, 
must  be  taken  into  consideration  in  making  a  valuation  of  it. 
Said  Judge  Hook: 

"An  established  railway  system  may  be  worth  more  than 
its  original  cost  and  more  than  the  mere  cost  of  its  physical 
reproduction.  It  has  passed  the  initial  period  of  little  or  no 
return  to  its  owners  which,  of  greater  or  less  duration,  almost 
always  follows  construction  and  is  not  infrequently  marked 
by  default  and  bankruptcy.  The  inevitable  errors  in  its  build- 
ing which  finite  minds  and  hands  cannot  avoid  have  been 
measurably  corrected,  time  and  effort  have  produced  a  com- 
mercial adjustment  between  it  and  the  country  it  was  intended 
to  serve,  relations  have  been  established  with  patrons,  and 
sources  of  traffic  have  been  opened  up  and  made  tributary.  In 
other  words,  the  railway,  unlike  one  newly  constructed,  is 
fully  equipped  and  is  doing  business  as  a  going  concern.  It 
has  attained  a  position  after  many  experiences  common  to 
railway  enterprises  which  entail  loss  and  cost  not  paid  from 
current  earnings,  and  which  correspondingly  make  for 
value."] 

We  may  reasonably  conclude,  therefore,  that  not  only  the 
cost  of  reproduction  of  the  physical  property  for  railway  pur- 
poses, but  also  its  strategic  location  and  the  ability  with  which 
it  is  managed  as  indicated  by  the  great  or  small  density  of  its 
traffic  and  its  relatively  large  or  small  operating  expenses, 
must  be  given  due  weight  in  fixing  its  valuation  for  rate- 
regulation,  and  that  any  valuation  for  rate-regulation  that 
does  not  give  due  weight  to  these  and  any  other  factors  that 
enter  into  its  utility  as  an  instrumentality  of  transportation 
will  not  secure  the  approval  of  the  Supreme  Court  of  the 
United  States.  It  will  not  be  easy  t©  work  out  a  formula  for 
valuation  that  will  give  due  weight  to  such  factors;  but  the 
difficulty  of  making  a  valuation  that  shall  be  legal  and  fair  is 
not  a  sufficient  reason  for  not  trying  to  make  fair  and  legal 
any  valuation  that  may  be  undertaken. 

The  view  taken  by  the  very  able  Railroad  Commission  of 


28  CURRENT   RAILWAY   PROBLEMS. 

Wisconsin  in  deciding  the  passenger-rate  cases  in  1907  seems, 
in  the  main,  to  coincide  with  the  opinions  expressed  in  this 
paper.  The  state  tax  commission  had  made  a  physical  valua- 
tion of  railways  based  on  cost  of  reproduction.  In  this  val- 
uation land  used  for  railway  purposes  was  appraised  at  two 
and  one-half  times  the  value  of  the  adjacent  land.  In  de- 
ciding the  case  of  Buell  v.  C,  M.  &  St.  P.  Railway  the  com- 
mission accepted  as  correct  the  tax  commission's  physical  val- 
uation of  the  St.  Paul  road.  This  valuation,  based  on  cost 
of  reproduction,  new,  was  $62,970,177;  less  depreciation, 
$50,832,356.  The  commission  said  that  to  take  the  latter  figure 
as  a  basis  for  rate-regulation  "leaves  out  of  account  the  value 
of  the  plant  as  a  going  concern,  the  business  it  has  built  up, 
the  connections  it  has  made."  And  after  quoting  from  the  de- 
cision of  the  United  States  Supreme  Court  in  Smyth  vs. 
Ames,  the  commission  continued: 

"We  have  carefully  considered  this  matter  of  valuation  and 
the  various  elements  that  should  be  taken  into  account  as  de- 
cided by  the  court.  Our  conclusion  is  so  near  to  the  cost  of 
reproduction,  new  ($62,970,000),  that  we  have  concluded  to 
adopt  that  valuation;  not  because  it  happens  to  be  made  on 
any  particular  basis,  but  because  it  is  equivalent  to  a  com- 
posite value  arrived  at  after  taking  into  account  the  various 
elements  suggested  by  the  court." 

If  the  Minnesota  commission  should  follow  the  example 
of  the  Wisconsin  commission  it  would  take  its  very  highest 
estimate — "Estimate  A,  Cost  of  Reproduction,  New,"  amount- 
ing to  an  aggregate  of  $411,735,195,  or  $54,204  per  mile—as  the 
correct  basis  for  regulation  of  rates.* 

*  As  already  noted,  Master  in  Chancery  Otis  adopted  an  even  higher 
valuation  than  the  commission's  ''Estimate  A,  Cost  of  Reproduction, 
New." 


IV. 

Under  the  present  system  of  railway-regulation  in  the 
United  States  part  of  the  valuation  of  any  railway  must  be 
allocated  to  state  and  part  to  interstate  business  before  it  can 
be  used  as  a  basis  for  fixing  rates.  For,  while  the  same  termi- 
nals, roadway,  locomotives,  and  cars  are  used  for  hauling  both 
state  and  interstate  traffic,  the  rates  on  state  traffic  are  regu- 
lated by  state  authorities;  those  on  interstate  traffic,  by  fed- 
eral authorities.  The  basis  on  which  this  division  of  valua- 
tion should  be  made  seems  almost  insoluble.  The  Wisconsin 
commission  appears  in  the  passenger-rate  cases  to  have  made 
the  division  on  the  basis  of  gross  earnings.  The  members  of 
the  Railroad  Commission  of  Washington  agreed  on  the  valua- 
tion recently  placed  on  the  railways  in  that  state,  but  they 
disagreed  entirely  on  how  the  valuation  should  be  divided. 
Chairman  Fairchild  contends  that  the  division  should  be  based 
on  net  earnings.  On  that  basis  65  per  cent,  of  the  valuation 
of  the  Great  Northern  in  the  state  should  be  allocated  to  state 
and  35  per  cent,  to  interstate  business,  and  its  state  rates 
should  be  slightly  reduced  and  its  interstate  rates  left  un- 
changed. Commissioners  Lawrence  and  Jones  favor  allocat- 
ing the  valuation  on  the  basis  of  the  cost  of  operation,  in 
which  case  45  per  cent,  of  the  valuation  of  the  Great  Northern 
should  be  allocated  to  state  and  55  per  cent  to  interstate  busi- 
ness, and  its  state  rates  should  be  radically  lowered  and  its 
.  interstate  rates  substantially  raised.  Now,  since  such  a  wide 
divergence  of  opinion  has  developed  between  the  members  of 
a  single  state  commission,  are  there  not  apt  to  develop  even 
wider  differences  of  opinion  between  the  state  and  the  inter- 
state commissions?  In  that  case  we  might  be  treated  to  the 
spectacle  of  a  state  commission  regulating  the  state  rates  of  a 
road  on  45  per  cent,  of  its  valuation,  and  the  interstate  com- 
mission regulating  its  interstate  rates  on  35  per  cent,  of  its 


30  CURRENT   RAILWAY   PROBLEMS. 

valuation,  in  which  event  it  would  earn  nothing  on  the 
remaining  20  per  cent,  of  its  valuation.  The  federal  courts 
would  then  have  to  arbitrate  between  the  warring  com- 
missions. 

Probably  the  only  way  fairly  and  rationally  to  settle  this 
question,  if  valuation  is  to  be  used  at  all  as  a  basis  for  rate- 
regulation,  would  be  to  have  a  single  valuation  made  and  all 
rates,  state  and  interstate,  regulated  by  a  federal  commission. 
This,  no  doubt,  would  require  an  amendment  of  the  Federal 
Constitution,  the  obstacles  in  the  way  of  which  are  familiar. 

[Master  in  Chancery  Otis  held  that  the  railways  of  Minne- 
sota could  not  apply  the  rates  fixed  by  the  legislature  and  rail- 
way commission  of  Minnesota  without  either  correspondingly 
reducing  their  interstate  rates  or  unfairly  discriminating 
against  interstate  commerce.  He  therefore  held  that  the  rates 
were  in  violation  of  the  Federal  Constitution,  not  only  because 
they  were  confiscatory  in  that  they  would  not  yield  the  rail- 
ways 7  per  cent,  on  a  fair  valuation,  but  also  because  they  in- 
terfered with  interstate  commerce.  If  his  findings  shall  be 
upheld  by  the  courts,  it  may  be  that  no  amendment  to  the 
Constitution  will  be  necessary  in  order  to  give  the  federal 
government  virtually  exclusive  jurisdiction  over  the  regula- 
tion of  rates.] 

A  valuation  based  solely  on  cost  of  physical  reproduction 
probably  would  result  in  such  a  road  as  the  Denver  &  Rio 
Grande,  with  its  difficult  mountainous  construction  and  com- 
paratively small  earnings,  being  appraised  per  mile  as  high 
as,  or  higher  than,  a  road  such  as  the  Union  Pacific,  with  its 
relatively  easy  construction  and  large  gross  and  net  earnings. 
An  appraisal  that  gave  due  weight  to  the  Union  Pacific's 
greater  density  of  traffic  and  lower  operating  expenses  would 
result  in  a  much  higher  valuation  being  placed  on  it.  Even 
then,  perhaps,  it  would  be  found  that  the  Union  Pacific's  earn- 
ings were  larger  in  proportion  to  its  valuation  than  the  rate- 
regulating  authority  considered  fair.  But  if  its  rates  were, 
consequently,  reduced  to  what  was  deemed  fair  all  the  com- 


VALUATION   OF  RAILWAYS.  31 

petitive  rates  of  the  Denver  &  Rio  Grande  would  also  have 
to  be  reduced,  with  the  result  that  its  earnings  would  be  made 
less  than  anybody  would  consider  fair.  Conditions  such  as 
these  would  be  met  all  over  the  country.  Would  the  regulat- 
ing authority  then  fix  rates  so  that  the  weak  lines  could  earn 
a  fair  return — 6  per  cent,  say — and  the  strong  lines  more  ?  Or 
would  it  fix  rates  so  that  the  strong  roads  could  earn  only  6 
per  cent,  and  the  weak  lines  little  or  nothing? 

[This  question  was  presented  in  a  very  practical  way  in  the 
Minnesota  rate  case.  The  three  roads  directly  involved  were 
the  Great  Northern  and  the  Northern  Pacific,  which  are  very 
strong  roads,  and  the  Minneapolis  &  St.  Louis,  which  is  a 
weak  line.    The  Master  in  Chancery  said: 

"Abandonment  of  either  of  these  roads  would  be  a  great 
public  calamity,  and  if  we  can  conceive  of  them  being  sud- 
denly obliterated,  their  immediate  reconstruction  would  fol- 
low in  response  to  public  necessity,  which  shows  that  they 
must  be  worth  what  it  would  cost  to  reproduce  them  and  that 
a  return  based  on  such  cost  would  not  be  oppressive.  The 
Minneapolis  &  St.  Louis  along  its  entire  line  comes  into  sharp 
competition  with  strong  intersecting  lines  and  while,  as  be- 
fore stated,  it  subserves  a  useful  purpose  and  operates  in  re- 
sponse to  public  demand,  it  can  be  maintained  only  by  the  ex- 
ercise of  the  highest  economy  and  watchfulness  in  its  opera- 
tion, and  to  succeed  it  must  be  given  greater  latitude  than  is 
necessary  with  respect  to  the  more  favorably  located  and  pros- 
perous lines  of  railway.  Necessarily,  to  get  business,  its  rates 
must  conform  to  those  existing  on  the  other  roads  where 
competition  is  an  element,  but  where  this  does  not  exist  it  is 
entitled  to  rates  not  so  controlled  by  competition  and  with 
reasonable  limits  must,  to  exist,  be  given  a  free  hand  in  the 
conduct  of  its  business."] 

No  matter  how  a  valuation  was  made,  obviously  it  would 
be  almost  worthless  in  determining  how  much  any  specific 
rate,  as  on  stone  or  dry  goods,  ought  to  be.  The  detailed 
classifications  and  schedules  of  rates  would  have  to  be  made 


32  CURRENT   RAILWAY   PROBLEMS. 

as  now;  for  if  it  were  attempted  to  make  the  rate  on  each 
commodity  pay  all  the  direct  and  indirect  expenses  of  hauling 
that  commodity  and  its  pro-rata  share  of  the  entire  return 
on  the  valuation,  the  movement  of  the  higher  classes  of  com- 
modities would  not  be  facilitated  or  increased,  but  the  move- 
ment for  any  considerable  distance  of  all  the  cheaper  and  bulk- 
ier commodities — grain,  coal,  lumber,  iron  ore,  etc. — quickly 
would  be^  stopped. 

[The  popular  idea  seems  to  be  that  rates  are  so  adjusted  as 
to  earn  a  return  on  the  capitalization  of  the  railway;  that 
many  railways  are  over-capitalized  and  charge  excessive  rates 
in  order  to  earn  a  return  on  their  excessive  capitalization,  and 
that  valuation  should  be  substituted  for  capitalization  as  the 
basis  of  rate-making.  The  great  trouble  with  this  theory  is 
that  it  is  entirely  false.  Most  traffic  managers  do  not  know 
the  capitalization  of  their  railways  and  would  pay  no  atten- 
tion to  it  in  fixing  rates  if  they  did.  The  principle  of  dimin- 
ishing costs  is  exemplified  to  such  marked  degree  in  railway 
operation  that  it  is  exceedingly  difficult  to  determine  how  re- 
munerative is  any  specific  rate  or  whether  it  is  remunerative 
at  all.  Fixed  charges,  including  interest  on  bonds,  taxes  and 
rentals  of  terminals,  equipment,  tracks,  etc.,  go  on  whether 
the  amount  of  traffic  handled  be  increased  or  not.  Whatever 
business  can  be  got  which  will  add  more  to  earnings  than  the 
handling  of  it  adds  to  expenses  is  worth  having,  no  matter 
how  low  is  the  rate  that  must  be  made  to  get  it.  Now,  obvi- 
ously, the  amount  of  the  capitalization  or  valuation  of  a  road 
has  absolutely  nothing  to  do  with  the  question  whether  partic- 
ular traffic  will  add  more  to  the  gross  earnings  of  a  railway 
than  it  will  add  to  its  gross  expenses.  Of  course,  it  is  con- 
ceivable that  if  all  railways  were  over-capitalized,  and  the 
traffic  could  bear  considerably  higher  rates,  rates  as  a  whole 
might  be  advanced  with  a  view  to  paying  a  return  on  the 
total  capitalization.  But  the  number  of  roads  that  are  over- 
capitalized is  relatively  small,  and  over-capitalization  of  these 
roads  actually  tends  to  keep  rates  down  rather  than  to  cause 


VALUATION   OF  RAILWAYS.  33 

them  to  be  raised.  An  over-capitalized  road  is  always  ex- 
tremely anxious  to  increase  its  earnings.  It  would  lose  busi- 
ness by  raising  its  rates  when  other  roads  did  not  raise  them. 
On  the  other  hand,  by  cutting  rates  it  may  get  business  from 
other  roads  that  it  could  not  otherwise  get,  and  often  this 
actually  happens.  For  example,  seven  years  ago  the  Chicago 
Great  Western,  which  is  well  known  to  be  over-capitalized,  re- 
duced the  proportional  rate  on  dressed  meats  from  Missouri 
river  to  Chicago  from  23j^  cents  to  18^  cents  per  100  pounds 
in  consideration  of  a  contract  by  the  large  meat  packers  to 
give  it  a  bigger  share  of  their  traffic.  When  this  contract  ex- 
pired last  spring  an  attempt  to  get  the  rate  advanced  was 
made.  The  roads  generally  favored  an  advance  except  the 
Chicago  &  Alton,  which  is  regarded  by  the  public  as 
one  of  the  classic  examples  of  an  over-capitalized  road. 
As  the  Alton  did  not  advance  the  rate  another  road  re- 
frained from  advancing  it.  This  was  the  Wabash,  which  also 
is  an  over-capitalized  road.  The  reason  why  the  Wabash  did 
not  raise  the  rate  was  that  it  could  not  afford  to  lose  any 
business  which  might  yield  it  some  profit,  however  little.  If 
the  popular  theory  that  over-capitalization  causes  railways  to 
raise  rates  were  correct,  these  roads  would  have  been  the 
leaders  in  advancing  this  rate,  whereas  one  of  them  reduced 
the  rate  in  opposition  to  the  wishes  of  all  of  its  competitors, 
and  the  other  two  kept  the  reduced  rate  in  effect  after  all 
competing  lines  raised  it.  The  very  remote  relation  between 
capitalization  and  rates  emerges  only  when  railways  resist  a 
general  reduction  or  seek  a  general  advance  in  rates  on  the 
ground  that  such  reduction  will  make  it  impossible,  or  such 
advance  is  necessary  to  enable  them,  if  they  maintain  satis- 
factory service,  to  pay  satisfactory  returns  on  reasonable 
capitalizations.] 

The  only  way  that  a  valuation  of  railways,  even  if  made  in 
the  fairest  and  wisest  possible  way,  could  be  used  for  any 
just  and  practical  purpose,  would  be  as  a  guide  in  determin- 


34  CURRENT   RAILWAY   PROBLEMS. 

ing  whether  or  not  the  various  railways  are  earning  more  or 
less  than  a  fair  return. 

[Even  if  it  were  found  that  some  roads  were  earning  more 
than  a  fair  return,  valuation  would  give  no  clue  to  what  rates 
should  be  reduced.  It  might  be  that  a  shipper  would  come 
in  and  complain  that  his  rate  was  too  high  and  ought  to  be 
reduced  because  the  road  was  earning  an  excessive  return  and 
that  investigation  would  show  that  in  proportion  to  other  rates 
his  rate  was  already  extremely  low,  and  that  the  road's  large 
return  was  being  derived  from  other  rates.  On  the  other 
hand,  valuation  might  show  that  some  roads  were  not  earn- 
ing a  fair  return.  Upon  the  theory  of  those  who  advocate 
valuation,  the  rates  ought  in  that  case  to  be  raised.  But  it 
might  be  that  its  rates  were  already  high  and  that  an  advance 
in  them  would  cause  destruction  of  traffic  which  would  ac- 
tually reduce  its  net  earnings.  In  that  event  on  this  theory, 
the  advance  in  the  rates  would  have  made  them  more  un- 
reasonably low  than  they  were  before.  Of  two  roads  handling 
the  same  kind  of  traffic  between  the  same  points  on  the  same 
rates,  one  may  have  very  large  net  earnings  and  the  other 
very  small  or  none.  If  we  are  to  use  the  total  return  as  the 
test  of  reasonableness  of  rates,  shall  we  say  in  such  cases  that 
the  rates  are  unreasonably  high  or  unreasonably  low?  After 
the  valuation  was  made  the  various  rates  and  schedules  of 
rates  would  have  to  be  made  as  they  are  now ;  that  is,  in  pro- 
portion to  what  the  various  kinds  of  traiHc  will  hear.  A  great 
many  persons  who  advocate  valuation  of  railways  as  a  basis  for 
rate-making  do  so  because  it  has  served  pretty  well  as  a  basis 
for  adjusting  the  charges  of  other  public  utilities.  But  a  rail- 
way differs  from  other  public  utilities  in  several  important 
particulars.  In  the  first  place,  a  public  utility  such  as  a  street 
railway  handles  only  one  kind  of  business,  whereas  a  railway 
handles  a  great  many  different  kinds  of  traffic  which  cannot 
bear  the  same  rates.  In  consequence,  while  the  adjustment 
of  the  rates  of  a  street  railway  or  a  waterworks  is  a  compara- 
tively simple  matter,  the  adjustment  of  the  rates  of  a  steam 


VALUATION   OF  RAILWAYS.  35 

railway,  which  apply  not  only  to  passengers,  but  to  8,000  or 
10,000  different  commodities,  is  a  very  complex  matter.  Again, 
a  public  utility  such  as  a  street  railway  or  a  waterworks  has 
a  monopoly  of  its  business,  while  in  every  territory  there  are 
numerous  railways  which  cost  different  amounts,  whose  valu- 
ations would  be  different  and  which  operate  under  different 
conditions,  but  which  must  make  the  same  rates  on  competi- 
tive business.  Again,  the  business  of  such  a  public  utility  as 
a  street  railway  or  a  waterworks  company  does  not  fluctuate 
much  from  year  to  year,  while  that  of  a  steam  railway  fluc- 
tuates greatly.  In  the  calendar  year  1908,  following  the  panic 
in  1907,  the  gross  earnings  of  the  railways  of  the  United 
States  declined  $300,000,000,  while  the  earnings  of  the  street 
railways  actually  increased.  The  recent  decision  of  the  Su- 
preme Court  of  the  United  States  in  the  Consolidated  Gas 
Company  case  has  been  frequently  cited  as  a  precedent  estab- 
lishing the  right  of  the  public  to  limit  the  profits  of  railways 
to  6  per  cent.  But  in  its  decision  in  this  case  the  court  plainly 
indicated  that  it  held  that  it  was  reasonable  to  restrict  the 
Consolidated  Gas  Company  to  6  per  cent,  because  the  invest- 
ment in  it  involved  so  little  risk.    The  court  said : 

"In  an  investment  in  a  gas  company,  such  as  complainant's, 
the  risk  is  reduced  almost  to  a  minimum.  .  .  .  The  court  be- 
low regarded  it  as  the  most  favorably  situated  gas  business 
in  America.  .  .  .  Under  the  circumstances,  the  court  held 
that  a  rate  which  would  permit  a  return  of  6  per  cent,  would 
be  enough  to  avoid  the  charge  of  confiscation,  and  for  the  rea- 
son that  a  return  of  such  an  amount  was  the  return  ordinarily 
sought  and  obtained  on  investments  of  that  degree  of  safety 
in  the  city  of  New  York.  Taking  all  facts  into  consideration, 
we  concur  with  the  court  below  on  this  question,  and  think 
complainant  is  entitled  to  6  per  cent,  on  the  fair  value  of  its 
property  devoted  to  the  public  use."     (212  U.  S.  19,  49,  50.)] 

Any  valuation  for  the  purpose  of  rate  regulation  should  be 
made  by  the  federal  government,  so  that  each  road  would  be 
appraised  as  a  whole.    Is  it  worth  while  to  spend  a  large  sum 


36  CURRENT   RAILWAY   PROBLEMS. 

of  money  to  make  one  wholesale  valuation  for  this  purpose? 
If  this  question  had  been  asked  two  years  ago  most  shippers 
and  railway  commissioners  would  have  answered  in  the  af- 
firmative and  most  railway  officers  would  have  answered  in 
the  negative.  Since  then  a  good  many  railway  officers  have 
modified  their  opinions  or  entirely  changed  them.  The  pop- 
ular view  is  that  the  railways  as  a  whole  are  greatly  over- 
capitalized and  that  they  are  charging  excessive  rates  to  pay 
dividends  on  watered  stock;  and  this  view  is  constantly  caus- 
ing enforced  reductions  in  passenger  and  freight  rates.  On 
the  other  hand,  railway  managers,  while  conceding  that  some 
roads  are  over-capitalized,  express  confidence  that  a  fair  ap- 
praisal of  all  the  railways,  based  even  on  cost  of  reproduc- 
tion alone,  would  far  exceed  their  aggregate  net  capitalization 
— arrived  at  by  eliminating  duplications  due  to  intercorporate 
ownership  of  securities — and  that  a  fair  appraisal  based  on 
all  the  factors  that  ought  properly  to  be  considered  would,  for 
all  the  railways,  far  exceed  their  present  gross  capitalization, 
and  demonstrate  that  railway  earnings  and  dividends  are  not 
excessive,  but  quite  the  contrary.  The  Minnesota  and  other 
valuations  lend  support  to  this  view. 

[The  popular  notion  of  the  present  attitude  of  railway  heads 
toward  valuation  is  erroneous.  It  is  assumed  that  they  op- 
pose a  valuation  for  fear  that  it  would  show  that  the  roads 
are  over-capitalized  and  are  earning  too  much.  The  numer- 
ous railway  presidents  with  whom  I  have  talked  have  been 
unanimous  in  saying  that  even  a  valuation  based  merely  on 
the  estimated  cost  of  reproducing  the  physical  properties  would 
greatly  exceed  not  only  the  net,  but  the  gross  capitalization 
of  the  railways  as  a  whole.  It  is  probable  that  even  a  com- 
mission unfairly  disposed  would  find  it  impossible,  if  it  really 
took  into  consideration  all  the  assets  of  the  roads,  to  make  a 
valuation  that  would  be  less  than  the  gross  capitalization. 
This  opinion  is  based  upon  actual  results  of  the  valuations  that 
have  been  made  in  Wisconsin,  Michigan,  Minnesota  and 
Washington.    In  Washington  the  commission  placed  on  two 


VALUATION  OF  RAILWAYS.  37 

of  the  three  large  roads  in  the  state  valuations  exceeding  their 
capitalizations  per  mile.  The  exception  was  the  Oregon  Rail- 
road and  Navigation  Company.  The  Commission  put  on  it 
a  valuation  of  $19,500,000,  which  is  substantially  less  than  its 
capitalization.  The  tax  commission  has  since  put  on  it  a  valu- 
ation for  taxation  of  $27,500,000,  which  is  substantially  in  ex- 
cess of  its  capitalization.  The  only  state  where  a  valuation 
has  been  made  which  is  greatly  less  than  the  capitalization  of 
the  roads  is  in  Texas.  Perhaps  this  fact  requires  no  com- 
ment, since  the  policy  of  Texas  toward  corporate  property  of 
all  kinds  is  pretty  well  known.  It  is  significant,  however,  that 
while  the  railroad  commission's  valuation  is  only  $212,794,586, 
and  the  capitalization  of  the  Texas  roads  is  $427,988,103,  the 
state  tax  board  values  the  properties  for  taxation  at 
$411,594,825.' 

It  may  safely  be  said  that  railway  officers  now  oppose  valu- 
ation, not  because  they  think  it  would  show  that  the  roads  as 
a  whole  are  over-capitalized,  but  because  they  think  a  valua- 
tion based  merely  on  the  estimated  cost  of  reproducing  the 
physical  properties  would  be  an  economic  absurdity,  and  that 
an  attempt  to  fix  rates  on  it  would  be  saved  from  being  absurd 
only  because  it  would  be  so  destructive  of  the  best  interests 
of  the  roads  and  of  the  public. 

The  economist  cannot  look  at  this  subject  from  exactly  the 
same  point  of  view  as  the  railway  officer.  His  duty  is  to 
consider  how  a  fair  valuation  can  be  arrived  at,  whether  it 
would  be  an  important  guide  in  fixing  rates  or  would  merely 

1  "In  the  recent  hearing  before  the  Interstate  Commerce  Commission, 
Mr.  R.  A.  Thompson,  who  for  many  years  had  been  the  chief  engineer 
to  the  Texas  Railroad  Commission,  testified  that  it  was  his  deliberate 
opinion  that  the  physical  property  of  the  railways  of  Texas  was  worth 
on  an  average  $30,000  per  mile  of  line.  That  is,  he  believes  that  the 
railways  cannot  be  replaced  at  the  current  prices  of  land,  labor  and 
materials  for  less  than  $30,000  per  mile,  an  amount  approximately  equal 
to  the  total  outstanding  stocks  and  bonds." — Potts,  "Railroad  Trans- 
portation in  Texas,"  page  194.  The  Railroad  Commission's  valuation  is 
but  $17,015  a  mile. 


38  CURRENT   RAILWAY   PROBLEMS. 

satisfy  public  curiosity,  what  its  costs  would  be,  and  whether 
the  expenditure  would  probably  be  warranted  by  the  advan- 
tages derived  by  the  public.  When  the  Supreme  Court,  in  the 
case  of  Smyth  v.  Ames,  said  that  a  railway  was  entitled  to 
a  fair  return  on  the  fair  value  of  its  property,  it  did  not  say 
that  this  is  all  which  it  legally  may  be  allowed  to  have  or 
which  it  ought  to  be  allowed  to  have  in  the  interest  of  the  pub- 
lic welfare.  It  simply  said  that  this  is  the  least  to  which  a  rail- 
way can  be  restricted  without  confiscating  its  property  con- 
trary to  the  constitution.  If  it  is  the  intention  of  the  public 
to  allow  and  compel  the  railway  to  charge  rates  which  are 
reasonably  proportioned  to  the  value  of  the  service  it  renders, 
and  when  it  does  so  to  allow  it  to  earn  a  return  as  large  in 
proportion  as  those  earned  in  other  businesses,  due  allowance 
being  made  for  difference  of  hazard  involved,  a  valuation 
would  serve  no  purpose  that  would  justify  the  expenditure  of 
the  millions  of  dollars  that  would  have  to  be  laid  out  to  make 
it.  On  the  other  hand,  if  it  is  the  intention  of  the  public  to  try 
to  restrict  the  railway  to  the  very  least  to  which  a  railway 
can  be  restricted  without  confiscation — in  other  words, 
to  allow  railways  to  have  only  the  very  least  of  which  they 
cannot  constitutionally  be  deprived — then  valuation  might 
serve  some  useful  purpose.  It  would  mark  the  limit  where 
confiscation  would  begin.] 

A  general  valuation  would  set  a  limit  below  which  reduc- 
tions of  rates  and  earnings  by  public  authority  could  not  go. 
If  it  showed  that  any  road,  or  all  the  roads,  earn  no  more 
than  a  fair  return,  it  would  be  notice  that  for  every  future 
reduction  in  rates  there  must  be  a  compensating  advance.  If 
it  showed  that  any  road,  or  all  the  roads,  earn  less  than  a  fair 
return,  it  would  practically  authorize  an  increase  in  rates. 
Therefore,  while  many  persons  are  advocating  valuation  of 
railways  as  a  means  of  getting  reductions  of  rates,  not  a  few 
railway  managers  of  prominence  are  disposed  to  regard  the 
project  as  a  possible  effective  means  of  preventing  further 
reductions,  or  even  securing  advances. 


SHALL  RAILWAY  PROFITS  BE  LIMITED?^ 

Unless  all  signs  fail,  the  phase  of  the  "railway  problem" 
which  will  occupy  the  largest  place  in  the  public  mind  and  in 
public  discussion  for  some  years  is  the  question  whether  rail- 
way profits  shall  be  limited ;  and  if  so,  how  and  to  what  extent. 
Both  the  Interstate  Commerce  act  and  various  state  laws  pro- 
hibit railway  rates  which  are  "unduly  discriminatory"  or  "un- 
just and  unreasonable,"  the  latter  phrase  meaning  as  here 
used,  excessive — exorbitant.  Everyone  agrees  that  these  are 
salutary  provisions.  It  is  commonly  assumed  that  large  profits 
result  from  high  rates.  It  is  therefore  concluded  by  many 
that  to  keep  rates  from  being  exorbitant  railway  profits  must 
and  should  be  restricted. 

This  theory  has  been  voiced  in  many  quarters.  Mr.  Geo.  A. 
Rankin,  in  a  recent  book,^  advocates  concentrating  the  control 
of  all  the  railways  of  the  United  States  in  one  holding  corpo- 
ration limited  to  a  net  return  of  5  per  cent.  In  many  pro- 
ceedings before  railway  commissions  and  courts  the  same 
doctrine  that  the  public  may  and  therefore  ought  to  restrict 
each  railway  to  a  "fair  return"  is  being  urged  by  those  who 
favor  reductions  of  rates  by  action  of  public  authorities  or 
who  oppose  advances  in  rates  sought  by  the  railways.  Efforts 
are  being  made  to  secure  the  passing  of  legislation  which  will 
establish  the  principle  of  limitation  of  profits  and  provide  spe- 
cial machinery  for  carrying  it  out.  The  plan  to  have  the 
Interstate  Commerce  Commission  make  a  valuation  of  all 
the  railways,  which  plan  was  approved  by  the  House  of  Rep- 
resentatives at  the  last  session  of  Congress  but  rejected  by 

^  Reprinted,  by  permission,  from  the  Journal  of  Political  Economy, 
October,    1910. 

2  An  American  Railway  Transportation  System:  A  Criticism  of  the 
Past  and  Present  and  a  Plan  for  the  Future. 


40  CURRENT   RAILWAY   PROBLEMS. 

the  Senate,  is  advocated  on  the  ground  that  the  roads  should 
be  restricted  to  a  "fair  return,"  and  that  what  is  a  "fair  re- 
turn" cannot  be  known  without  ascertaining  the  value  of  their 
properties.  Typical  of  many  bills  introduced  in  the  last 
Congress  was  that  of  Representative  William  R.  Smith  of 
Texas.  This  bill  would  have  required  the  Commission  to  fix 
all  interstate  rates  so  that  they  would  "yield  only  a  reasonable 
sarily  involved  in  fixing  fair  and  reasonable  rates,  no  one,  per- 
haps, would  question  the  constitutionality  or  expediency  of 
net  return  on  a  fair  value  of  the  carrier's  property  as  deter- 
mined by  the  commission." 

If  it  were  indisputable  that  limitation  of  profits  is  neces- 
the  proposed  policy.  But  railway  counsel  and  managers,  and 
some  competent  students  of  railway  affairs,  contend  that 
limitation  of  profits  is  not  necessarily  involved  in  just  and 
effective  regulation  of  rates,  but  is  a  different  and  even  an- 
tagonistic policy.  The  cornerstone  of  the  theory  that  limita- 
tion of  profits  is  essential  to  effective  regulation  of  rates  is  the 
assumption  that  there  is  a  fixed  causal  relation  between  rates 
and  profits  owing  to  which  they  rise  and  fall  together.  Now, 
this  is  not  true.  It  is  true  that  a  railway  with  high  rates  may 
earn  large  profits,  and  that  a  railway  with  low  rates  may  cam 
small  profits.  But  it  is  also  true  that  a  railway  with  low  rates 
may  earn  large  profits,  and  that  one  with  high  rates  may 
earn  small  profits.  The  average  rate  per  ton  per  mile  of  the 
Central  of  Georgia  in  1909  was  almost  11  mills  and  its  net 
earnings  per  mile  were  $1,500,  while  the  average  rate  per  ton 
per  mile  of  the  Lake  Shore  &  Michigan  Southern  was  only  a 
little  over  5  mills,  and  its  net  earnings  per  mile  were  $9,350. 
It  is  true  that  raising  rates  may  increase  profits  and  that  a  re- 
duction of  rates  may  reduce  profits.  But  raising  rates  may 
reduce  profits  and  a  reduction  of  rates  may  cause,  or  at  least 
be  accompanied  by,  an  increase  of  profits.  Which  result  will 
follow  always  depends  on  the  effect  upon  the  volume  of  the 
traffic.  The  average  rate  per  ton  per  mile  in  the  United 
States  declined  from  9.41  mills  in  1890  to  7.59  mills  in  1907, 


LIMITING   RAILWAY   PROFITS.  41 

or  19  per  cent;  and  meantime  the  average  net  earnings  of 
the  railways  of  the  country  increased  from  $2,300  to  $3,696 
per  mile,  or  61  per  cent. 

The  profits  of  a  railway  are  affected  by  many  factors  of 
which  the  amount  of  the  rate  is  but  one.  Profits  are  the  differ- 
ence between  gross  earnings  and  expenses.  Gross  earnings 
depend  on  the  nature  and  density  of  the  traffic  as  well  as  on 
the  rates  applied  to  it.  Expenses,  both  in  the  aggregate  and 
per  unit  of  traffic,  depend  on  how  much  and  what  kind  of 
traffic  is  handled,  on  what  kind  of  a  territory  it  is  hauled 
through,  and  on  what  kind  of  a  management  the  railway  has. 
Of  two  roads  handling  the  same  kind  of  traffic,  between  the 
same  points,  on  the  same  rates,  one  may  have  very  large  net 
earnings  and  the  other  only  small  net  earnings  or  even  none. 
If  we  are  to  use  profits  as  the  test  of  the  reasonableness  of 
rates,  shall  we  say  in  such  cases  that  the  rates  are  unreason- 
ably high  or  unreasonably  low?  A  road  might  be  earning 
more  than  a  "fair  return."  Its  rates  on  the  theory  under  con- 
sideration would  be  held  unreasonable.  By  advancing  them  it 
might  destroy  enough  traffic  to  reduce  its  earnings  to  a  "fair 
return."  Would  it  thereby  make  its  rates  reasonable?  A 
road  might  be  earning  exactly  a  "fair  return."  By  a  reduction 
in  its  rates,  causing  a  large  increase  in  its  traffic,  or  by  im- 
provements in  its  plant  or  operating  methods,  causing  reduc- 
tions in  its  operating  expenses,  it  might  raise  its  net  earn- 
ings above  a  "fair  return."  Would  this  reduction  in  its  rates, 
or  these  improvements  in  its  plant  or  methods,  make  the 
rates  of  this  road  unreasonable? 

The  foregoing  considerations  show  that  limiting  profits  is 
really  quite  a  distinct  thing  from  requiring  reasonable  rates. 
The  constitutionality  and  expediency  of  legislation  to  limit 
profits  must,  therefore,  be  decided  on  other  grounds  than 
that  of  regulation  to  secure  fair  and  reasonable  rates. 

Many  persons,  including  most  railway  commissioners  and 
numerous  lawyers,  think  that  it  has  been  settled  by  decisions 
of  the  Supreme  Court  of  the  United  States  that  the  profits  of 


42  CURRENT   RAILWAY   PROBLEMS. 

railways  may  constitutionally  be  limited.  Mr.  Justice  Harlan ' 
said  in  the  opinion  of  the  court  in  the  Nebraska  Rate  Case^ 
that  "what  the  [railway]  company  is  entitled  to  earn  is  a 
fair  return  on  the  fair  value  of  that  which  it  employs  for  the 
public  convenience."  This  is  interpreted  to  mean  that  a  "fair 
return"  is  all  to  which  a  railway  is  entitled.  It  is  argued  that 
the  "fair  value"  of  the  property  is  that  for  which  it  could  be 
physically  reproduced,  and  that  a  "fair  return"  is  the  current 
rate  of  interest  on  good  securities.  It  is  therefore  concluded 
that  a  valuation  of  the  properties  of  railways  should  be  made, 
and  that  rates  should  then  be  so  adjusted  from  time  to  time 
that  each  road  will  earn  only  the  current  rate  of  interest  on 
its  valuation. 

Counsel  for  the  railways  and  some  able  constitutional  law- 
yers repudiate  this  interpretation  of  Justice  Harlan*s  state- 
ment.* Justice  Harlan  did  not  say  that  all  the  railway  com- 
pany is  entitled  to  demand  is  a  fair  return,  but  that  this  is  the 
least  to  which  it  is  entitled.  That  he  did  not  mean  that  this 
is  the  maximum  which  it  may  be  entitled  to  receive  is  indi- 
cated by  a  statement  made  four  years  later  by  Justice  Brewer 
in  rendering  the  opinion  in  Cotting  v.  Godard:^ 

"As  to  parties  engaged  in  performing  a  public  service, 
while  the  power  to  regulate  has  been  sustained,  negatively 
the  [supreme]  court  has  held  that  the  legislature  may  not 
prescribe  rates  which  if  enforced  would  amount  to  a  confisca- 
tion of  property.  But  it  has  not  held  aMrmatively  that  the 
legislature  may  enforce  rates  which  stop  only  this  side  of 
confiscation.  .  .  ." 

1  Smyth  V.  Ames,  169  U.S.  466,  decided  in  1897. 

2  See,  for  example,  an  address  by  Walker  D.  Hines,  chairman  of  the 
Executive  Committee  and  general  counsel  of  the  Atchison,  Topeka  & 
Santa  Fe,  before  the  Traffic  Club  of  Pittsburgh,  March  18,  1910.  Also 
an  address  by  United  States  Senator  W.  J.  Bailey  of  Texas,  eminent 
as  a  constitutional  lawyer,  before  the  New  York  Bar  Association, 
January  20,  1910. 

*  183  U.S.  79,  91.     Italics  are  the  present  writer's. 


LIMITING   RAILWAY   PROFITS.  43 

This  shows  that  the  court  had  not  up  to  that  time  held  that 
railway  profits  might  be  limited;  and  it  has  not  so  held  since. 
What,  then,  would  it  probably  hold  if  the  point  were  squarely 
presented  to  it? 

The  Interstate  Commerce  act  as  amended  by  the  Hepburn 
and  the  recent  Mann-Elkins  acts  provides  that  after  the  Inter- 
state Commerce  Commission  shall  find  a  rate  unduly  dis- 
criminatory or  unreasonable,  it  shall  "determine  and 
prescribe  what  will  be  the  just  and  reasonable  rate  ...  to 
be  thereafter  observed  in  such  case  as  the  maximum  to  be 
charged."  Now,  the  minimum  rate  a  railway  can  ever 
reasonably  accept  is  one  which  will  develop  traffic  that 
will  add  a  little  more  to  its  earnings  than  to  its  expenses. 
If  the  traffic  developed  adds  $100  to  expenses  and  but 
$99  to  earnings,  obviously  the  rate  is  lower  than  the 
railway  can  reasonably  accept.  The  maximum  rate  a  rail- 
way can  ever  reasonably  charge  is  one  which  falls  a  little 
short  of  the  value  of  the  service  rendered  for  it.  If  100 
pounds  of  a  commodity  are  worth  $1  in  A  and  $1.25  in 
B,  and  the  rate  per  100  pounds  from  A  to  B  is  25  cents,  the 
owner  will  gain  nothing  by  shipping  it  from  A  to  B.  But  if 
the  rate  be  but  20  cents  it  will  cost  a  little  less  than  the  value 
of  the  service  rendered  by  transporting  the  commodity  from 
A  to  B ;  and  the  owner  can  ship  it  at  a  profit.  Now,  railway 
counsel  argue,  in  view  of  these  facts  it  is  evident  that  what 
the  Interstate  Commerce  act  means  is  that  the  commission 
cannot  reduce  a  rate,  no  matter  what  profits  the  railway  is 
making,  unless  the  rate  exceeds  the  maximum  reasonable 
value  of  the  service  rendered  for  the  rate — in  other  words,  is 
extortionate.  In  support  of  this  view  they  call  attention  to 
the  fact  that  when  the  Hepburn  bill  was  pending  it  was  pro- 
posed to  give  the  Commission  authority  to  fix  absolute  rates, 
and  that  it  was  also  proposed  to  empower  it  to  fix  minimum 
as  well  as  maximum  rates.  Both  these  propositions  were 
rejected,  because  Congress  thought  it  might  be  desirable  in 
some  cases  for  the  railways  to  make  lower  rates  than  those 


44  CURRENT   RAILWAY   PROBLEMS. 

fixed  by  the  Commission.  But  it  cannot  be  assumed  that 
Congress  meant  to  encourage  the  railways  to  make  any  rates 
unreasonably  low.  It  must  follow  that  it  meant  that  the  Com- 
mission should  fix,  not  rates  which  would  limit  railway  profits 
to  a  "fair  return,"  but  merely  rates  which  would  relieve  and 
protect  shippers  and  travelers  from  unfair  discrimination  or 
extortion;  and  that  if  the  commission,  as  the  law  stands, 
should  try  to  regulate  rates  with  a  view — not  to  making  each 
and  every  one  of  them  a  reasonable  compensation  for  the 
service  rendered  for  it — but  for  the  purpose  of  limiting  or 
reducing  the  profits  derived  by  the  railway  from  its  rates  as 
a  whole,  the  courts  would  hold  that  it  had  undertaken  to 
exercise  a  power  which  Congress  had  not  attempted  to  con- 
fer on  it  by  existing  law,  and  that  therefore  its  action  was 
illegal. 

But  what  authority  over  rates  and  profits  Congress  has  con- 
ferred on  the  Commission  by  the  Interstate  Commerce  Act 
as  it  stands,  is  a  different  question  from  the  question  as  to 
what  further  authority  Congress  and  the  state  legislatures 
might  in  future  exercise  themselves  or  delegate  to  the  Com- 
missions. The  really  interesting  and  important  question  is, 
could  legislation,  either  state  or  national  or  both,  constitu- 
tionally be  passed  and  enforced  which  should  require  railway 
rates  to  be  so  regulated  as  to  limit  the  profits  of  each  or  all 
of  the  railways  to  the  current  rate  of  interest  or  any  other 
basis  which  the  lawmakers  or  the  commissions  might  con- 
sider a  fair  return;  or  has  the  railway  a  right  of  property  to 
demand  and  receive  a  reasonable  compensation  for  each  ser- 
vice it  renders,  which  right  cannot  be  taken  away  or  inter- 
fered with,  practically  regardless  of  how  much  its  profits  in 
the  aggregate  may  be? 

Most  railway  commissions  and  many  lawyers  believe 
such  legislation  to  limit  profits  would  be  upheld.  For, 
they  reason,  the  railway  is  engaged  in  a  public  service; 
it  exercises  the  power  of  eminent  domain;  and  therefore 
Congress    and    the     state    legislatures,     or    commissions    to 


LIMITING   RAILWAY   PROFITS.  45 

which  they  delegate  the  requisite  power,  may  regulate  its 
charges  in  any  way  they  believe  for  the  public  good,  so 
long  as  they  do  not  contravene  those  provisions  of  the 
fifth  and  fourteenth  amendments  to  the  federal  Constitu- 
tion which  prohibit  confiscation  of  property.  Many  railway 
lawyers  and  other  persons  who  have  studied  the  subject  re- 
ject this  view.  They  believe  there  are  limitations  on  the 
power  to  regulate  public  service  concerns  besides  those  im- 
posed by  the  fifth  and  fourteenth  amendments.  The  authority 
of  the  states  to  regulate  rates  is  a  police  power  derived  from 
the  common  law.  The  power  of  Congress  to  regulate  them 
is  derived  from  the  Interstate  Commerce  clause  of  the 
federal  Constitution,  which,  like  other  parts  of  the  Constitu- 
tion, must  be  interpreted  in  the  light  of  the  common  law.* 
Now,  it  never  was  the  common  law  that  the  profits  of  one  en- 
gaged in  a  public  service  could  be  limited.  Justice  Brewer  in 
Cotting  V.  Godard'  defined  the  rule  of  the  common  law  to  be 
that  the  person  who  engaged  in  a  public  service  had  "a  right 
to  charge  for  each  separate  service  that  which  was  a  reason- 
able compensation  therefor."  If  a  shipper  thought  a  carrier 
had  charged  him  an  exorbitant  rate  he  might  sue  the  carrier 
'to  recover  the  excessive  portion.  The  court  then  determined 
whether  the  charge  was  reasonable,  not  by  computing  how 
much  profit  the  carrier  was  making  from  its  entire  business, 
but  by  ascertaining  what  the  particular  service  was  worth  by 
reference  to  the  skill  with  which  the  service  was  rendered,  its 
value  to  the  shipper,  what  was  customarily  paid  for  like 
services  under  similar  conditions,  etc.  Justice  Brewer  in  the 
opinion  in  Cotting  v.  Godard  indicated  that  the  common-law 


*  "The  code  of  constitutional  and  statutory  construction  which  is 
gradually  formed  by  the  federal  courts  in  the  application  of  the  Con- 
stitution, and  the  laws  and  treaties  made  in  pursuance  thereof,  has  for 
its  basis  the  common  law.  .  .  ." — Cyclopedia  of  Law  and  Procedure, 
VIII,  385. 

•183   U.S.  79,   decided  in   1901,  four  year*  after  Smyth  v.  Ames. 


46  CURRENT   RAILWAY   PROBLEMS. 

rule  was  still  in  effect,  and  could  not  be  abrogated  by  statute. 
He  said: 

'Its  [the  legislature's]  prescription  of  rates  is  prima  facie 
evidence  of  their  reasonableness  .  .  .  but  it  does  not 
follow  therefrom  that  the  legislature  has  power  to  reduce 
any  reasonable  charges  because  by  reason  of  the  volume  of 
business  done  by  the  party  he  is  making  more  profit  than 
others  in  the  same  or  other  business.  The  question  is  always, 
not,  What  does  he  make  as  the  aggregate  of  his  profits  but, 
What  is  the  value  of  the  services  which  he  renders  to  the  one 
seeking  and  receiving  such  services.  .  .  .  The  amount  of 
the  aggregate  profits  may  be  a  factor  in  considering  the  ques- 
tion of  the  reasonableness  of  the  charges,  but  it  is  only  one 
factor,  and  is  not  that  which  finally  determines  the  question 
of  reasonableness.'*    183  U.  S.  79,  97. 

As  the  decision  in  this  case  turned  on  other  points  than 
the  reasonableness  per  se  of  the  rates  involved,  these  remarks 
of  Justice  Brewer  are  regarded  as  obiter  dicta;  but  his  state- 
ment that  legislatures  cannot  reduce  any  charge  conforming 
to  the  common-law  standard  of  reasonableness  merely  be- 
cause a  concern's  profits  are  large  is  significant.  Of  course, 
if  a  legislature  cannot  do  this,  a  commission  cannot. 

In  other  cases  the  Supreme  court  has  indicated  that  there 
are  limitations  on  the  power  of  public  authorities  to  regulate 
railways  besides  those  which  prohibit  confiscation.  In  the 
case  of  Monongahela  Navigation  Company  v.  U.  5./  which 
was  decided  some  years  before  Catting  v.  Godard,  the  court 
said: 

"For  each  separate  use  of  one's  property  by  others,  the 
owner  is  entitled  to  a  reasonable  compensation,  and  the  num- 
ber and  amount  of  such  uses  determines  the  productiveness 
and  the  earnings  of  the  property,  and  therefore,  largely  its 
value." 

In  Lake  Shore  &  Michigan  Southern  Railroad  Company 

« 

1 148  U.S.  312.  328. 


LIMITING  RAILWAY   PROFITS.  .     47 

V.  Smith,^  speaking  of  the  property  right  of  railways  in  the 
management  of  their  affairs,  it  said: 

"What  the  company  may  choose  voluntarily  to  do  furnishes 
no  criterion  for  the  measurement  of  the  power  of  a  legisla- 
ture. Persons  may  voluntarily  contract  to  do  what  no  legis- 
lature would  have  the  right  to  compel  them  to  do." 

And  in  the  recent  case  of  Interstate  Commerce  Commission 
V.  C.  G.  W.  Ry.^  which  arose  under  the  Elkins  law,  and  was 
decided  after  the  Hepburn  act  was  passed,  it  said: 

"It  must  be  remembered  that  railways  are  the  private  prop- 
erty of  their  owners;  that  while,  from  the  public  character  of 
the  work  in  which  they  are  engaged,  the  public  has  the  power 
to  prescribe  rules  for  securing  faithful  and  efficient  service 
and  equality  between  shippers  and  communities,  yet,  in  no 
proper  sense,  is  the  public  a  general  manager." 

Those  who  think  that  railway  profits  cannot  be  limited 
construe  these  statements  to  mean  that  public  authorities 
may  so  regulate  railways  as  to  require  them  to  give  the  public 
good  and  adequate  service  at  fair  and  reasonable  rates;  but 
that  if  they  go  farther  than  this,  and  seek  to  direct  the  inter- 
nal management  of  the  railways  and  to  say  what  profits  they 
may  earn  and  what  dividends  they  may  ^ay,  they  encroach 
on  the  private  side  of  the  carriers  and  invade  prerogatives 
and  rights  which  the  Constitution,  so  long  as  the  carriers 
continue  to  be  private  property,  reserves  to  their  owners  and 
managers. 

Many  persons  will  think  that  if  this  is  the  correct  view 
the  situation  is  unfortunate,  and  that  the  Constitution  should 
be  so  amended  as  specifically  to  empower  and  require  public 
authorities  to  restrict  railways  to  an  average  return  approxi- 
mating the  current  rate  of  interest  on  either  their  cash  in- 
vestments or  the  value  of  their  physical  properties.  It  is  con- 
tended that  as  railway  corporations  are  created  by,  derive  all 

«173  U.S.  684,  697. 
^209  U.S.   118,  119. 


48  CURRENT   RAILWAY   PROBLEMS. 

their  power  from,  and  in  maintaining  a  public  highway,  exer- 
cise a  function  of,  the  state,  the  public  has  at  least  a  moral 
right  to  limit  their  profits. 

The  question  of  most  importance  after  all,  however,  is  not 
what  the  public  has  a  legal  or  an  abstract  moral  right  to  do, 
but  what  it  is  to  its  interest  to  do.  If  it  is  reasonably  sure 
to  inure  to  the  good  of  the  public  to  limit  railway  earnings 
as  proposed,  this  limitation  ought  to  be  made.  The  interest  of 
the  public  is  superior  to  all  other  considerations.  But  when 
we  consider  all  that  would  be  involved  in  carrying  out  the 
policy  of  limitation  of  railway  profits  in  the  way  that  is 
advocated,  and  when  we  consider  all  the  effects  that  this 
policy  would  probably  produce,  it  may  be  doubted  whether  the 
majority  will  regard  it  as  expedient. 

Regulation  of  railways  should  aim  to  secure  three  main 
objects:  (1)  safe,  good,  and  adequate  transportation;  (2) 
rates  which  do  not  unfairly  discriminate;  and  (3)  the  lowest 
rates  compatable  with  good  service.  The  criterion  of  the  ex- 
pediency of  any  policy  is  the  way  in  which  it  is  adapted  to 
attaining  these  ends. 

To  carry  out  effectively  the  proposed  policy  of  regulation 
through  limitation  of  profits  would  require  extension  of 
regulation  to  almost  every  detail  of  the  railway  business.  The 
Supreme  Court  has  said  that  the  public  is  in  no  proper  sense 
the  general  manager  of  the  railways.  It  would  have  to  be- 
come their  general  manager  to  carry  out  this  policy.  The 
railway  commissions  would  have  to  be  authorized  to  fix  the 
basis,  or  valuation,  on  which  a  return  might  be  earned,  and 
also  the  percentage  of  return  to  be  allowed.  Then  they 
would  have  to  exercise  absolute  control  over  railway  ac- 
counting. For  each  road  constantly  spends  money  for  main- 
tenance of  equipment,  track,  etc.,  and  also  for  permanent  im- 
provements. Now,  maintenance  is  chargeable  to  operating 
expenses,  while  permanent  improvements  are  chargeable  to 
capital  account;  new  securities  entitled  to  the  "fair  return" 
could  be  issued  against  them.    But  as  to  just  where  expendi- 


LIMITING   RAILWAY   PROFITS.  49 

turcs  for  maintenance  and  expenditures  for  permanent  im- 
provements begin  expert  opinions  differ.  The  railway  man- 
agements, desiring  to  build  as  broad  a  basis  of  valuation  and 
capitalization  as  possible,  would  be  disposed  to  charge  all  of 
the  expenditures  within  this  "twilight  zone"  to  permanent 
improvements;  and  to  prevent  them  from  unreasonably  swell- 
ing their  capitalizations  railway  commissions  would  have  to 
be  empowered,  and  would  have  to  exercise  firmly  and  in 
great  detail  the  power,  to  determine  to  what  account  each 
item  of  expenditure  should  be  charged. 

Again,  profits  are  the  margin  between  earnings  and  ex- 
penses. The  management  of  a  railway,  seeing  that  its  profits 
were  about  to  pass  the  limit  of  a  "fair  return,"  might  prefer 
to  check  their  growth  by  unnecessarily  increasing  its  expenses 
rather  than  by  reducing  its  rates.  To  prevent  the  railways 
from  thus  anticipating  the  government  in  limiting  their 
profits  commissions  probably  would  have  to  be  given  authority 
to  say  what  wages  should  be  paid  by  them,  what  prices  they 
should  pay  for  materials — in  short,  to  control  their  expendi- 
tures as  thoroughly  as  their  rates. 

It  is  sometimes  said  that  if  the  dividends  railways  might 
pay  were  limited  they  would  invest  their  surplus  profits  in 
permanent  improvements  and  extensions;  and  that  more  ade- 
quate and  efficient  facilities  of  transportation  would  result. 
It  is  not  uncommon  now  for  a  road  to  earn  10,  15,  or  even 
20  per  cent,  annually,  and  to  pay  out  in  dividends  only  6  or  8 
per  cent.,  the  surplus  earnings  being  spent  on  extensions  and 
improvements.  This,  it  is  said,  is  clearly  more  to  the  inter- 
est of  the  public  than  for  a  road  to  pay  out  its  entire  net 
earnings  annually  to  its  security  holders;  and  if  all  railways 
were  required  to  pursue  a  similar  policy  the  public  would 
benefit  greatly.  But  railways  do  not  voluntarily  limit  the 
profits  that  they  earn.  They  merely  limit  the  amount  of 
their  profits  that  they  pay  out  in  dividends.  And  they  do  not 
limit  the  amount  that  they  pay  out  in  dividends  because  they 
think  the  stockholders  ought  not  to  have  more,  but  because 


50  CURRENT   RAILWAY   PROBLEMS. 

they  desire,  by  investing  part  of  past  earnings  in  the  improve- 
ment of  the  plants,  to  give  the  public  safer  and  better  service, 
and  to  maintain  or  increase  the  earning  capacity  of  the  roads 
so  as  to  enable  them  in  the  long  run  to  pay  the  stockholders 
more  than  they  could  if  improvements  were  not  made  out  of 
earnings.  Now,  under  a  policy  of  governmental  limitation  of 
profits,  not  the  dividends,  but  the  net  earnings,  of  each  rail- 
way would  be  restricted  to  the  current  rate  of  interest.  Con- 
sequently, unless  a  company  refused  to  pay  its  stockholders 
the  current  rate  of  interest,  it  could  not  have  any  surplus  earn- 
ings to  invest  in  improvements;  and  if  its  earnings  equaled 
the  current  rate  of  interest  it  would  not  withhold  any  of 
them  to  invest  in  improvements,  because  no  doubt  the  main 
object  of  a  railway  in  investing  earnings  in  improvements 
is  to  increase  its  profits;  and  no  increase  of  profits  would  be 
allowed. 

The  principal  purposes  of  improvements  in  methods  of 
operation  are  the  same  as  those  of  improvements  in  indus- 
trial plants,  viz.,  to  give  the  public  better  service  and  to 
reduce  operating  expenses,  and  thereby  increase  profits.  As 
under  the  proposed  policy  no  increase  in  profits  exceeding 
the  current  rate  of  interest  would  be  allowed,  there  apparently 
would  be,  after  net  earnings  reached  that  point,  as  little  in- 
centive for  the  management  to  improve  its  operating  methods 
as  to  improve  its  plant.  In  fact,  there  would  be  a  deterrent 
to  attempting  improvements.  At  present  improvements  are 
undertaken  with  the  hope  of  increasing  profits,  but  always 
with  the  knowledge  that  their  cost  may  turn  out  to  exceed 
their  worth.  Under  the  proposed  policy,  if  an  attempted  im- 
provement turned  out  unprofitably  the  road  would  have  to 
bear  the  loss;  while  if  it  turned  out  well,  none  of  the  benefit 
would  go  to  the  railway's  stockholders  in  the  form  of  in- 
creased dividends,  but  all  of  it  would  go  to  shippers  and 
travelers  in  the  form  of  reduced  rates. 

So  it  would  seem  that  the  enterprise,  initiative,  and  plans 
for  making  improvements  in  plants  and  methods  in  order  to 


LIMITING  RAILWAY   PROFITS.  51 

reduce  the  expenses  of  operation  would  have  to  be  supplied 
by  railway  commissions,  which  would  have  to  be  given  large 
power  and  discretion  to  coerce  inert  and  refractory  railway 
managements  along  the  path  of  progress.  It  will  be  hard  for 
most  persons  to  believe  that  under  this  plan  the  development 
and  improvement  of  transportation  facilities  would  go  on  as 
rapidly  and  cheaply  as  in  the  past.  Public  commissions,  how- 
ever intelligent  and  powerful,  hardly  could  get  railway  mana- 
gers and  owners  to  make  as  great  improvements  as  they 
make  voluntarily  under  the  stimulus  of  the  desire  and  expec- 
tation of  gain. 

Another  consequence  of  this  policy  would  be  the  necessity 
of  obtaining  in  the  money  market  in  the  form  of  new  capital 
all  the  financial  means  for  making  permanent  improvements 
in  our  railways.  This,  if  it  could  be  done,  would  probably 
result  in  a  rapid  increase  in  railway  capitalization.  English 
railways  have  followed  this  method  in  making  their  perma- 
nent improvements,  and  this  is  one  of  the  main  reasons  why 
they  are  capitalized  for  $314,000  a  mile,  while  the  net  capitali- 
zation of  the  railways  of  the  United  States  is  but  $59,259 
a  mile.' 

But  could  these  financial  means  be  secured  in  the  money 
market?  If  railway  capital  were  to  be  both  limited  to,  and 
guaranteed,  the  current  rate  of  interest,  plenty  could  be  ob- 
tained. But  those  who  advocate  limiting  profits  repudiate 
suggestions  that  the  maximum  return  fixed  by  the  public  shall 
also  be  guaranteed  by  the  public  as  a  minimum.  Can  it 
reasonably  be  expected  that  capitalists  would  invest  billions 
in  railways  knowing  that  they  would  have  only  a  very  re- 
stricted control  over  their  property,  and  would  not  be  allowed 
more  than  the  current  rate  of  interest,  and  might  receive  less 
or  even  nothing? 

Let  us  now  consider  what  effects  the  proposed  policy  would 

*  Twenty-second  Annual  Report  of  the  Interstate  Commerce  Com- 
mission (for  1909),  56. 


52  CURRENT   RAILWAY   PROBLEMS. 

have  on  rates.  It  would  not  help  to  eliminate  unfair  dis- 
criminations. For  discrimination  consists  entirely  in  the  rela- 
tion of  rates.  A  road  all  of  whose  rates  are  low  and  which  is 
not  earning  its  operating  expenses  can  discriminate  just  as 
unlawfully  and  perniciously  as  one  that  is  enormously  pros- 
perous. Discrimination  being  entirely  a  matter  of  the  relation 
of  rates,  it  can  only  be  corrected  by  changing  their  relation. 
While  limitation  of  profits  would  not  help  to  remove  or  pre- 
vent discriminations,  it  is  conceivable  that  it  might  sometimes 
have  the  opposite  effect.  Suppose  a  community  alleged  that 
a  railway  which  was  earning  exactly  a  "fair  return"  was  dis- 
criminating against  it.  The  commission  could  not  reduce  the 
rates  of  the  complaining  community,  because  that  might 
reduce  the  earnings  of  the  railway  below  a  "fair  return." 
It  could  not  raise  the  rates  of  the  favored  community 
because  no  existing  law  gives  a  commission  power  to  raise 
a  rate.  And  the  road  could  not  raise  its  rates  to  the 
favored  community  because  that  might  increase  its  profits 
above  a  "fair  return."  How,  then,  could  the  discrimination 
be  corrected? 

It  is  commonly  assumed  that  limitation  of  profits  would 
tend  to  make  rates  low.  This  is  the  main  reason  why  it  is 
advocated.  The  average  rate  per  ton  per  mile  in  the  United 
States  in  1870  was  18.89  mills.  In  1887,  when  the  Interstate 
Commerce  act  was  passed,  it  had  been  reduced  to  9.84  mills, 
or  52  per  cent.  Between  1887  and  1906,  in  which  latter  year 
the  Hepburn  act  went  into  effect,  it  declined  from  9.84  mills 
to  7.48  mills,  or  24  per  cent.  Government  regulation  had  no 
hand  in  the  great  and  innumerable  reductions  prior  to  1887 
reflected  in  the  decline  in  the  average  rate.  They  were  made 
by  the  traffic  managers  of  the  railways.  It  had  very  little 
hand  in  the  great  and  innumerable  reductions  in  the  period 
1887-1906.  Practically  all  were  made  by  the  traffic  managers. 
The  traffic  managers  voluntarily  made  these  reductions  for 
two  reasons.  First,  each  of  them  sought,  by  lowering  his 
rates,    to    capture   business    from    competitors.      Competitive 


LIMITING  RAILWAY   PROFITS.  53 

rate-making  has  now  been  greatly  reduced — although  not 
wholly  eliminated — ^by  railway  combinations  and  consolida- 
tions and  by  legislation  requiring  the  roads  to  publish  all  their 
rates,  and  to  give  extended  notice  of  proposed  changes.  The 
second  reason  why  the  traffic  managers  reduced  rates  was 
that  they  hoped  thereby  to  develop  so  much  additional  traffic 
that  the  net  returns  from  it  on  the  lower  rates  would  exceed 
the  net  returns  from  a  smaller  traffic  on  the  higher  rates. 
Often  this  hope  was  disappointed;  then,  whenever  practicable, 
the  old  rates  were  restored.  The  desire  to  increase  earnings 
is  just  as  prevalent  and  strong  today  as  ever;  and  the  traffic 
managers  still  manifest  it  not  only  by  raising  the  rates  on 
commodities  the  volume  of  whose  movement  they  think  will 
not  thereby  be  reduced,  but  also  by  reducing  them  on  com- 
modities the  volume  of  whose  movement  they  think  will 
thereby  be  largely  increased.  They  seek  constantly  to  make 
that  adjustment  which  will  3rield  the  railway  the  largest  per- 
manent return,  and  they  know  that  in  the  long  run  they  will 
get  the  largest  return  by  making  no  rates  that  are  lower,  and 
none  that  are  higher,  than  the  traffic  easily  can  bear.  The 
enormous  increase  of  traffic  shows  that,  as  a  whole,  the  rates 
of  American  railways  are  not  burdensome  to  commerce,  but 
are  admirably  adapted  to  foster  its  growth. 

Now,  it  is  obvious  that  limitation  of  profits  would  deprive 
the  traffic  manager  of  every  railway  which  was  earning  a  "fair 
return"  of  all  incentive  voluntarily  to  make  reductions  in 
rates.  At  present  if  the  traffic  manager  has  a  movement  of 
empty  cars  in  one  direction,  and  a  shipper  convinces  him 
that  by  making  a  certain  reduction  in  rates  he  can  develop 
traffic  that  will  fill  his  empty  cars  and  add  something  more  to 
his  road's  earnings  than  to  its  expenses,  he  will  promptly 
make  the  reduction.  But  under  a  policy  of  limiting  profits 
he  would  not  be  keen  to  experiment  with  reductions  in  rates, 
for  he  would  know  that  if  he  did  not  develop  as  much  traffic 
as  he  expected  to,  and  a  loss  of  net  eslrnings  resulted,  it 
would  have  to  be  borne  by  the  railway,  while  if  an  increase  of 


54  CURRENT   RAILWAY   PROBLEMS. 

net  earnings  resulted,  it  would  be  wiped  out  by  further  reduc- 
tions of  rates  by  public  authorities. 

It  may  be  answered  that  if  the  traffic  managers  did  not 
make  reductions  the  regulating  authorities  would.  But  it  has 
never  yet  been  demonstrated  that  the  railways,  as  a  whole,  are 
now  earning  more  than  a  fair  return  on  a  fair  valuation. 
Most  of  those  who  have  studied  the  subject  believe  that  a 
fair  valuation  would  show  that  to  reproduce  the  railways  of 
the  country  as  a  whole  would  cost  much  more  than  their 
present  aggregate  capitalization/  Now,  the  net  earnings  of 
the  railways  as  a  whole  do  not  exceed  the  average  current 
rate  of  interest  on  their  present  aggregate  capitalization.  The 
dividends  declared  in  1909,  applied  to  all  the  stock  outstand- 
ing, averaged  only  4  per  cent.  On  the  theory  of  a  "fair  return 
on  a  fair  valuation"  general  reductions  in  rates  by  the  regu- 
lating authorities  probably  could  not  now  be  justified.  And 
if  the  conclusion  reached  in  a  previous  part  of  this  paper  is 
correct — viz.,  that  this  policy  would  tend  to  reduce  the  enter- 
prise of  railway  management,  and  thereby  to  increase  ex- 
penses of  operation — it  probably  would  make  it  impossible  for 
regulating  authorities  to  require  general  reductions,  and,  on 
the  other  hand,  render  it  possible  for  the  railways,  on  the 
ground  that  they  were  not  earning  a  "fair  return,"  legally  to 
make  even  greater  general  advances  than  they  are  now  seek- 
ing to  justify  on  the  ground  of  increasing  expenses  of 
operation. 

It  may  be  replied  that  while  the  railways  as  a  whole  are 
not  earning  excessive  profits,  there  are  some  that  are;  and 

*  Their  net  capitalization  in  1909,  according  to  the  Interstate  Com- 
merce Commission,  was  $13,711,867,733.  United  States  Senator  A.  B. 
Cummins,  of  Iowa,  is  an  advocate  of  limitation  of  profits,  yet  in  a 
speech  before  the  Traffic  Club  of  Chicago  on  February  8,  1910,  he  said 
he  believed  a  valuation  would  show  it  would  cost  $20,000,000,000  to 
reproduce  the  physical  properties  of  the  railways.  He  therefore  opposes 
a  valuation.  He  contends  that  railways  are  not  entitled  to  the  "un- 
earned increment"   in  their  properties. 


LIMITING   RAILWAY   PROFITS.  55 

that  while  the  policy  of  limitation  of  profits  might  not  lead 
to  general  reduction  of  rates,  or  even  prevent  general  ad- 
vances, it  at  least  would  prevent  advances  and  justify  reduc- 
tions on  those  roads  which  are  earning  more  than  a  "fair 
return."  Hitherto  in  this  paper  I  have  treated  the  railways 
of  this  country  as  if  they  were  a  single  system.  The  fact  that 
they  are  not,  far  from  making  the  carrying  out  of  the  policy 
of  limitation  of  profits  through  regulation  of  rates  more 
feasible  and  expedient,  makes  it  much  less  so.  For  railways 
vary  as  widely  in  their  abilities  and  characteristics  as  the  men 
who  manage  them.  In  every  section  there  are  some  whose 
traffic  is  relatively  heavy,  whose  operating  expenses  are  rela- 
tively small,  and  whose  net  earnings  per  mile  are  relatively 
large.  In  the  same  sections  there  are  other  roads  whose  traffic 
is  relatively  light,  whose  operating  expenses  are  relatively  large, 
and  whose  net  earnings  are  relatively  small.  Everywhere 
these  two  classes  of  roads  compete  for  business.  They  must 
make  the  same  rates  or  the  road  which  makes  the  lowest  rates 
will  get  all  of  the  competitive  business;  and  therefore  if  the 
regulating  authorities  so  reduced  or  held  down  the  rates  of  the 
stronger  roads  as  to  limit  their  profits  to  a  "fair  return"  the 
weaker  roads  would  be  restricted  to  less  than  a  "fair  return." 
If  the  rates  of  the  stronger  roads,  such  as  the  Pennsylvania, 
the  Lake  Shore  &  Michigan  Southern,  the  Burlington,  the 
Chicago  &  Northwestern,  the  Louisville  &  Nashville,  and  the 
Union  Pacific,  should  be  so  held  down  or  lowered  as  to 
restrict  their  net  earnings  to  the  current  rate  of  interest,  the 
net  earnings  of  other  roads  would  be  reduced  much  below  it, 
and  many  would  be  bankrupted. 

The  policy  of  governmental  control  and  limitation  of  profits 
through  regulation  of  rates  does  not  seem  well  adapted  to 
secure  any  of  the  main  objects  of  regulation  of  railways.  It 
appears  to  be  more  apt  to  injure  than  to  benefit  the  public. 
The  most  equitable,  effective,  and  beneficial  way  to  determine 
and  fix  reasonable  rates  is  to  proceed  in  much  the  same  way 
that  the  courts  determined  what  was  a  reasonable  rate  under 


56  CURRENT   RAILWAY   PROBLEMS.     ' 

the  common  law.  When  an  individual  rate  or  a  schedule  of 
rates  is  in  question,  whether  that  rate  or  schedule  is  fair  and 
reasonable  cannot  be  determined  merely  by  reference  to  how 
much  profit  the  railway  is  making  in  the  aggregate.  For  if 
the  road's  profits  were  small,  it  might  be  held  that  the  rate  or 
schedule  was  reasonable;  whereas  the  fact  might  be  that  the 
particular  rate  or  schedule  in  question  was  excessive  and  that 
the  smallness  of  the  road's  profits  was  due  to  the  excessive- 
ness  of  this  rate  or  schedule,  or  to  the  lowness  of  its  other 
rates,  or  to  bad  management.  And  if  its  profits  were  large 
it  might  be  held  that  the  particular  rate  or  schedule  in  ques- 
tion was  excessive;  whereas  the  fact  might  be  that  that  rate 
or  schedule  actually  was  unfairly  low  and  that  the  road's 
profits  were  all  derived  from  other  and  higher  rates.  Simi- 
larly, if  the  large  profits  of  a  single  road  were  considered,  it 
might  be  held  that  its  rates  were  excessive;  whereas  investi- 
gation might  disclose  that  other  roads  hauling  the  same  kinds 
and  amounts  of  traffic,  under  substantially  similar  conditions, 
for  the  same  rates,  were  making  small  or  no  profits;  which 
would  show  that  the  differences  in  profits  were  mainly  or  en- 
tirely due  to  differences  in  the  skill  of  the  managements.  The 
Interstate  Commerce  Commission  said  in  one  of  its  opinions 
in  Central  Yellow  Pine  Association  v.  Illinois  Central  Rail- 
road Co.,  et.  al  (10  I.  C.  C.  505,  539,  540,  538) : 

"While  the  Supreme  Court  has  undertaken  to  point  out 
'certain  elements'  to  be  considered  in  determining  the  rea- 
sonableness of  an  entire  system  of  rates,  it  has  not  named  any 
as  shedding  light  upon  the  reasonableness  of  a*  rate  on  a 
single  commodity  like  lumber.  It  is  evident  that  such  ele- 
ments are  widely  variant  in  the  two  cases.  Where  an  entire 
system  of  rates  is  involved,  the  principal,  if  not  the  only  ques- 
tion, is,  whether  the  revenue  yielded  by  the  rates  on  all  traffic 
is  a  fair  return  on  the  value  of  that  which  is  'employed  for 
the  public  convenience* — a  question,  the  determination  of 
which,  as  we  have  shown,  can  have  only  a  very  remote,  if 


LIMITING  RAILWAY  PROFITS.  57 

any  practical,  bearing  on  the  reasonableness  of  a  rate  on  a 
single  article  of  traffic.  On  the  other  hand,  where  the  rate 
on  a  single  article  is  in  issue,  the  question  (which  could  not 
arise  in  the  former  case),  whether  the  rate  is  unjustly  dis- 
criminatory or  unduly  preferential,  may  be  presented,  and  the 
reasonableness  of  the  rate  depends  upon  the  value,  volume 
and  other  characteristics  affecting  the  transportation  of  the 
particular  commodity  to  which  it  is  applied." 
And  again: 

"The  rate  on  one  article  of  traffic  may  be  reasonably  high 
and  the  carrier  fail  to  earn  a  fair  return  on  the  value  of  the 
entire  property  employed  for  the  public  convenience  because 
of  unreasonably  low  rates  on  other  traffic,  and  vice  versa,  the 
rate  on  one  article  of  traffic  may  be  unremunerative  or  un- 
reasonably low  and  the  return  to  the  carrier  from  its  entire 
business  may  be  fair  or  reasonably  high,  the  deficiency  under 
the  rate  on  the  one  article  of  traffic  being  made  up  by  the  rates 
on  the  balance  of  the  traffic." 

Some  consideration  ought  and  must  be  given  to  the  profits 
of  railways  in  determining  what  rates  they  should  be  allowed 
to  charge.  Considering  any  particular  territorial  group  of  rail- 
ways as  a  whole,  or  the  railways  of  the  entire  country  as  a 
whole,  it  seems  quite  obvious  that  their  earnings  must  be 
sufficient  to  pay  reasonable  operating  expenses,  fixed  charges 
and,  on  the  average,  as  large  dividends,  in  proportion  to  the 
risks  of  investment,  as  are  paid  on  investments  in  banks,  fac- 
tories, farms,  jobbing  houses,  etc.,  or  capital  will  to  so  large 
an  extent  quit  seeking  investment  in  railways  as  to  so  greatly 
arrest  their  development  and  extension  that  they  will  become 
incapable  of  satisfactorily  handling  the  growing  traffic  which 
the  proportionately  larger  investments  in  and  development  of 
other  businesses  will  cause  to  be  offered  to  them.  But  the 
profits  of  any  particular  railway  or  group  of  railways  are  not, 
and  should  not  be  used  as,  the  sole  or  even  the  main  criterion 
of  whether  any  particular  rates,  or  even  entire  schedules  of 


58  CURRENT   RAILWAY   PROBLEMS. 

rates,  are  reasonable.  There  should  also  be  considered  the 
nature  of  the  services  rendered;  their  value  to  the  shippers  re- 
ceiving them ;  how  the  profits  of  the  railways  affected  compare 
with  those  of  other  industrial  concerns  in  the  same  territory; 
the  density  and  nature  of  the  traffic ;  how  much  the  traffic  can 
reasonably  bear;  how  much  other  railways  than  those  in- 
volved charge  for  similar  services  and  earn  on  similar  rates, 
etc.  If,  in  view  of  these  considerations,  the  rates  seem  un- 
reasonably high  per  se  they  should  be  reduced;  and  if  they 
seem  unreasonably  low  per  se  they  should  be  allowed  to  be 
advanced.  The  courts  have  held  that  railways  cannot  charge 
extortionate  rates  per  se,  even  if  they  cannot  otherwise  make 
any  profit,  and  it  would  seem  that  if  they  do  make  reasonable 
rates  it  is  neither  equitable  nor  expedient  to  reduce  their  rates 
merely  because  their  profits  are  large.  It  would  seem  that  the 
most  effective  way  to  get  low  rates  would  be,  not  to  provide 
that  the  reasonableness  of  a  railway's  rates  should  be  meas- 
ured by  the  amount  of  its  profits,  and  that  the  greater  its 
earnings  grew  the  lower  it  would  have  to  make  its  rates,  but 
to  provide,  if  some  practicable  way  of  carrying  out  such  a  plan 
could  be  devised,  that  the  reasonableness  of  the  profits  should 
be  measured  by  the  reasonableness  of  the  rates,  and  that  the 
lower  a  road  made  its  rates  the  larger  should  be  the  profits 
that  it  would  be  allowed  to  enjoy. 


RAILWAY  RATES  AND  RAILWAY 
EFFICIENCY.! 

Louis  T.  Brandeis,  attorney  for  the  eastern  shippers  in  the 
rate  advance  cases,  has  relieved  the  monotony  of  the  hearings, 
and  added  much  to  the  gayety  of  nations  but  very  little  to  the 
sum  of  useful  knowledge,  by  asserting,  and  undertaking  to 
show^  how,  the  railways  of  the  United  States  can  reduce 
their  operating  expenses  $365,000,000  a  year.  Mr.  Brandeis' 
statement  and  the  evidence  he  has  introduced  to  support  it 
merit  serious  consideration,  because  they  have  been  printed 
broadcast  over  the  country,  and,  therefore,  no  doubt,  have 
tended  to  give  to  the  uninformed  the  impression  that  Amer- 
ican railways  are  very  inefficiently  operated. 

The  first  comment  that  suggests  itself  regarding  the  posi- 
tion taken  by  Mr.  Brandeis  is  that  it  involves  the  abandon- 
ment of  the  theory  on  which  the  shippers  heretofore  have 
opposed  advances  in  freight  rates.  Their  contention  has  been 
that  the  railways  have  so  greatly  increased  the  efficiency  of 
their  plants  and  operating  methods  during  the  past  ten  years 
that,  in  spite  of  the  advances  that  have  taken  place  in  the 
costs  of  labor  and  materials,  they  do  not  need  higher  rates. 
Obviously,  the  contention  that  the  railways  have  greatly  in- 
creased the  efficiency  of  their  plants  and  operations  and  do 
not  need  an  increase  in  earnings,  and  the  contention  that  they 
are  inefficiently  operated  and  should  get  the  additional  revenue 
they  need  by  abandoning  their  inefficient  methods,  are  not 
quite  compatible.  The  railways  of  the  United  States,  with 
the  smallest  capital  expenditure  per  mile  of  any  railways  in 
the  world,  have  carried  freight  and  passengers  at  the  lowest 
rates  in  the  world,  while  paying  the  highest  wages  for  labor 

*An  editorial  in  the  Railway  Age  Gasettet  December  2,   1910. 


60  CURRENT   RAILWAY   PROBLEMS. 

and  the  highest  prices  for  materials  in  the  world.  This  does 
not  indicate  inefficient  management.  The  manufacturers  of 
the  United  States,  while  paying  the  highest  wages  of  any 
manufacturers  in  the  world,  have,  in  the  main,  charged  the 
highest  prices  of  any  manufacturers  in  the  world  for  their 
goods.  Mr.  Brandeis  cites  the  great  improvements  in  methods 
in  manufacturing  plants  as  examples  to  be  imitated  by  the 
railways.  One  of  two  things  is  true:  either  the  factories  of 
the  United  States,  whose  owners  Mr.  Brandeis  represents, 
are  not  as  efficientlly  operated  as  American  railways  are  oper- 
ated, or  there  has  been  no  justification  for  the  manufacturers 
raising  their  prices  as  much  as  they  have  in  the  last  ten  years, 
while  railway  rates  have  remained  practically  stationary.^ 

There  were  239,052  miles  of  railway  in  the  United  States 
on  June  30,  1910.  Their  operating  expenses  per  mile  in  the 
fiscal  year  1910  were  $7,727,  of  which  $1,563  was  charged  to 
maintenance  of  way  and  structures,  $1,746  to  maintenance  of 
equipment,  $3,895  to  transportation  and  the  rest  to  general 
and  traffic  expenses.  The  average  reduction  per  mile  in  op- 
erating expenses  which  would  have  to  be  effected  to  obtain 
the  aggregate  economy  suggested  by  Mr.  Brandeis  would  be 
$1,527,  which  could  be  secured  by  a  reduction  of  14  per  cent, 
in  the  cost  of  transportation,  30  per  cent,  in  expenditures  for 
maintenance    of   way   and    structures,    and   30   per   cent,    in 

■The  following  is  from  the  Bulletin  of  the  Bureau  of  Labor  for 
March,  1910:  "Wholesale  prices  in  March,  1910,  were  higher  than  at 
any  time  in  the  preceding  20  years,  being  7.5  per  cent,  higher  than  in 
March,  1909;  10.2  per  cent,  higher  than  in  August,  1908;  21.1  per 
cent,  higher  than  the  average  yearly  price  of  1900;  33.8  per  cent, 
higher  than  the  average  price  for  the  ten  years  1890  to  1899;  and 
49.2  per  cent,  higher  than  the  average  yearly  price  of   1897." 

Compare  the  foregoing  with  the  following  regarding  railway  rates  for 
the  same  years,  except  for  1910,  the  official  figure  for  which  is  not  yet 
available:  The  average  rate  per  ton  per  mile  in  the  year  ended  June  30, 
1909,  was  7.63  mills,  or  1.19  per  cent,  higher  than  in  1908;  4.66  per 
cent,  higher  than  in  1900;  9  per  cent,  lower  than  the  average  rate  for 
the  ten  years  1890  to  1899;  and  4.38  per  cent,  lower  than  the  average 
rate  of  1897. 


RAILWAY   RATES   AND   EFFICIENCY.  61 

expenditures  for  maintenance  of  equipment.  The  average 
operating  ratios  of  the  railways  of  the  United  States  would 
have  to  be  reduced  from  about  67  per  cent,  to  53  per  cent. 
Everyone  familiar  with  railway  affairs  knows  that  many 
great  economies  have  been  made  within  the  past  decade,  and 
that  many  more  can  be  effected.  Mr.  Harrington  Emerson, 
who  has  been  widely  quoted  as  saying  that  the  railways  are 
worse  managed  than  any  other  industries  really  said  in  his 
testimony  before  the  Interstate  Commerce  Commission:  "I 
do  not  think  that  the  management  of  the  railways  has  de- 
teriorated at  all  in  ability.  I  think,  on  the  contrary,  that  it  is 
fully  up  to  if  not  ahead  of  the  average  ability,  and  probably 
ahead  of  what  it  was  some  years  ago."  But  everyone  who  is 
aware  how  fast  operating  expenses  have  increased  in  spite  of 
the  great  improvements  in  plants  and  operating  methods 
which  have  been  made  knows  that  talk  of  effecting  any  such 
reductions  in  operating  expenses  as  Mr.  Brandeis  and  his 
witnesses  outlined  is  the  merest  moonshine.  The  larger  econ- 
omies have  been  carried  out.  Only  the  smaller  remain  to  be 
made.  If,  in  spite  of  the  larger  ones,  operating  expenses  have 
increased  so  fast,  how  can  it  be  expected  that  they  will  not 
continue  to  increase  in  spite  of  the  smaller  ones? 

The  greatest  obstacle  in  the  way  of  effecting  even  the 
economies  that  are  possible  is  that  the  railways  cannot  secure 
from  the  shippers,  the  public  and  their  employees  the  co- 
operation which  is  necessary  to  render  them  practicable. 
One  of  the  criticisms  made  by  Mr.  Brandeis  of  railway  opera- 
tion is  that  cars  and  engines  are  not  loaded,  as  heavily  as  they 
might  be,  and  that  the  average  movement  of  a  freight  car  is 
only  25  miles  a  day.  The  railway  managers  have  been 
struggling  for  years  to  remedy  these  conditions,  and  Mr. 
Brandeis*  clients  and  other  shippers  have  prevented  their  cor- 
rection. The  two  main  things  necessary  to  get  cars  loaded 
more  heavily  is  to  raise  the  minimum  carload  weights  and  to 
hold  at  terminals  cars  carrying  less-than-carload  freight  until 
they  are  fully  loaded.     The   railways  in  recent  years  have 


62  CURRENT   RAILWAY   PROBLEMS. 

made  many  advances  in  carload  minimums ;  but  the  opposition 
of  the  shippers  has  been  so  strong  that  carload  minimums 
are  lower  now,  compared  with  the  average  capacity  of  cars, 
than  they  were  ten  years  ago.  The  shippers  at  Pittsburgh, 
Chicago,  St.  Louis  and  numerous  other  cities  have  within 
recent  years  successfully  solicited  the  railways  to  put  in  oper- 
ation numerous  package  cars  running  to  all  parts  of  the 
United  States  on  regular  schedules  for  the  handling  of  less- 
than-carload  freight.  A  car  which  runs  on  a  regular  schedule 
must  be  started  on  its  journey  when  the  time  comes  for  it  to 
leave  whether  it  has  a  full  load  or  not.  The  abolition  of  pack- 
age cars  would  enable  the  roads  to  get  heavier  loading  per  car. 
But  do  the  shippers  want  them  to  effect  economy  in  this  way, 
or  would  they  rather  pay  a  somewhat  higher  rate  for  the 
better  service? 

The  only  way  that  engines  could  in  all  cases  be  loaded  to 
their  maximum  capacity  would  be  to  hold  cars  at  terminals 
until  the  maximum  trainload  each  engine  could  pull  had  been 
accumulated.  That  would  result  in  increased  economy  in 
railway  operation.  But  would  the  shippers  submit  to  economy 
being  secured  in  that  way?  There  is  constant  complaint  from 
shippers  that  traffic  does  not  move  expeditiously  enough 
now.  Mr.  Brandeis  himself  criticises  because  the  average 
movement  of  a  freight  car  is  but  25  miles  a  day.  But  how 
could  the  railways  detain  cars  until  they  got  the  maximum 
tonnage  rating  of  each  engine,  and  at  the  same  time  increase 
the  average  movement  per  car  per  day? 

The  statement  that  freight  cars  move  an  average  of  only  25 
miles  a  day  is  true,  but,  as  made  by  Mr.  Brandeis,  utterly 
misleading.  The  average  speed  of  freight  cars  when  in  mo- 
tion is  not  25  miles  a  day,  but  about  10  miles  an  hour.  The 
only  way  to  form  a  correct  opinion  as  to  how  efficiently 
freight  cars  are  handled  on  the  average  by  the  railways  is  to 
consider  in  detail  the  average  car's  movement  from  the  time 
it  is  started  to  be  loaded  until  it  has  completed  its  trip  and 
been  unloaded.     The  average  time  required  for  the  loaded 


RAILWAY   RATES  AND   EFFICIENCY.  63 

and  empty  car  movement  involved  in  the  average  haul  of 
freight  in  the  United  States  is  about  12  days,  and  the  average 
distance  the  car  moves  about  330  miles.  Two  days'  free  time 
is  usually  allowed  for  loading  and  also  for  unloading  (not 
including  Sundays  and  holidays,  for  which  additional  free 
time  is  allowed),  and  the  statistics  of  the  demurrage  bureaus 
show  that  the  delays  of  the  car  at  terminals  by  the  shippers 
and  consignees  for  loading  and  unloading  average  about  4^/2 
days  for  each  movement.  This  leaves  an  average  of  7j^ 
days  during  which  the  car  actually  is  in  the  possession  of  the 
railway  and  gives  an  average  movement  of  about  44  miles 
per  day.  This  time  during  which  the  car  is  in  the  possession 
of  the  railway  includes  all  legitimate  detention  of  it,  such  as 
for  switching  in  and  out  at  both  terminals,  for  switch- 
ing for  classification  in  yards  en  route,  for  rigid  in- 
spection and  frequent  shoppings,  and  for  transfer  of  lading 
by  reason  of  enforcement  of  the  stringent  safety  appliance 
regulations  now  in  effect.  It  includes  the  period  during 
which  cars  are  held  for  reconsignment  to  accommodate  ship- 
pers, and  also  the  periods  during  which  cars  are  in  shops ; 
and,  on  the  average,  about  5  per  cent,  of  the  total  number  of 
cars  are  in  the  shops  at  any  given  time.  It  also  includes  the 
movement  not  merely  of  loaded  cars,  but  also  of  empty  cars; 
and,  of  course,  the  average  movement  of  empty  cars  is  much 
less  than  of  loaded  cars,  because  the  empty  car  stands  on  the 
sidings  for  much  longer  periods,  which  periods  of  idleness  are 
included  in  the  average  movement.  The  effect  of  a  heavy 
reduction  in  traffic  and  a  consequent  proportionate  increase 
in  the  number  of  empty  cars  on  the  average  movement  of  all 
freight  cars  was  strikingly  shown  just  after  the  panic  of  1907. 
In  October,  1907,  when  traffic  was  very  heavy,  the  average 
movement  of  all  the  cars  in  the  United  States  was  24.8  miles 
per  day.  In  April,  1908,  there  were  substantially  700,000  idle 
cars,  including  those  in  shops ;  and  in  that  month  the  average 
movement  per  day  was  but  19.6  miles,  or  20  per  cent,  less 
than  it  was  in  October,  1907.    Now,  there  are  four  months  in 


64  CURRENT   RAILWAY   PROBLEMS. 

every  year  when  practically  all  the  freight  cars  in  the  country 
are  busy,  and  eight  months  when  a  large  part  of  them  arc  not 
in  service,  and,  of  course,  the  great  number  of  cars  idle  dur- 
ing these  eight  months  pulls  down  the  figure  showing  the 
average  movement. 

When  all  these  conditions  are  taken  into  consideration  it 
does  not  seem  at  all  surprising  that  the  average  movement  of 
a  freight  car  is  but  25  miles  a  day.  It  also  appears  perfectly 
evident  that  those  who  are  best  situated  to  increase  this 
average  movement  are  the  shippers,  who  have  actual  posses*- 
sion  of  the  car  for  loading  and  unloading  more  than  one- 
third  of  the  time,  who  have  practical  possession  of  it  for  a 
considerable  time  for  reconsignment,  and  whose  failure  to 
provide  a  more  uniform  traffic  throughout  the  year  makes  it 
necessary  for  eight  months  of  the  year  to  have  thousands  of 
cars  standing  idle  on  side  tracks. 

The  question  of  car  efficiency  is  more  than  a  matter  of  mere 
movement.  Probably  the  best  combination  unit  of  car  per- 
formance is  that  of  ton-miles  per  car  per  day,  which  was 
invented  by  the  committee  on  car  efficiency  of  the  American 
Railway  Association.  The  statistics  of  the  association  show 
that  this  item  is  increasing.  The  average  number  of  tons 
hauled  one  mile  per  car  per  day  in  April,  1907,  was  348,  and  in 
November,  1909,  the  record  figure  of  413  ton-miles  per  car 
per  day  was  made,  an  increase  of  over  18  per  cent.  This 
increase  was  secured  by  better  car  loading  and  a  reduction 
of  empty  mileage.  The  increase  in  efficiency  would  have  been 
much  greater  if  the  efforts  to  secure  it  had  met  less  opposi- 
tion from  the  shippers. 

One  of  the  main  obstacles  to  increasing  car  and  locomo- 
tive efficiency  is  the  congested  condition  of  yards  and  ter- 
minals. And  this  condition,  it  would  seem,  can  be  remedied 
only  by  the  expenditure  of  large  sums  of  money,  which  must 
either  be  derived  from  earnings  or  obtained  by  the  sale  of 
securities  to  the  payment  of  the  interest  and  dividends  on 
which  earnings  must  be  applied. 


RAILWAY   RATES   AND   EFFICIENCY.  65 

Experience  in  the  shops  of  many  private  concerns  and  of 
not  a  few  railways  has  proved  that  very  substantial  economies 
might  be  effected  in  railway  shops  as  a  whole  in  the  United 
States.  But  the  difficulties  in  the  way  of  introducing  efficiency 
methods  in  railway  shops  are  much  greater  than  in  other 
shops.  If  the  manufacturer  wishes  to  adopt  efficiency  meth- 
ods and  his  employees  object,  he  can  lock  them  out  or  shut 
down  his  plant  until  they  come  to  terms.  But  the  railway, 
being  a  public  service  corporation,  cannot  close  its  shops 
whenever  it  pleases  and  keep  them  closed  as  long  as  it  likes. 
That  would  mean  that  its  transportation  service  would  rapidly 
become  impaired,  and  in  course  of  time  would  cease  alto- 
gether; and  this  the  law  and  public  opinion  will  not  tolerate. 
Labor  unions  usually  oppose  efficiency  methods,  because  such 
methods  are  based  on  the  theory  that  each  man  should  be 
paid  in  proportion  to  the  quality  and  quantity  of  the  work  he 
does  and  tend  to  stimulate  each  employee  to  do  a  greater 
amount  of  work  than  he  otherwise  would  do,  which  results 
in  the  employment  of  fewer  men  than  otherwise  would  be 
employed.  Nowhere  has  the  introduction  of  efficiency  meth- 
ods been,  or  is  it  now,  more  stubbornly  opposed  by  labor 
unions  than  it  is  in  railway  shops;  and  it  is  the  deliberate 
judgment  of  practically  all  persons  competent  to  form  an 
opinion  that  before  more  efficient  methods  could  be  introduced 
in  all  railway  shops  it  would  be  necessary  to  go  through  the 
worst  railway  strike  that  ever  took  place  in  this  country. 
The  only  reason  why  the  railways  do  not  try  forcibly  to  adopt 
more  efficient  methods  and  take  the  risk  of  provoking  strikes 
is  that  they  they  fear  that  a  misguided  public  sentiment  would 
side  with  the  labor  unions  instead  of  with  the  roads.' 

^  Mr.  Brandeis  has  made  the  error  of  treating  the  business  of  railway 
transportation  as  if  it  were  a  manufacturing  industry.  ^  But  running  a 
railway  is  not  like  manufacturing;  it  is  more  like  keeping  house. 

For  example,  one  of  the  largest  items  in  the  operating  expenses  on 
every  great  railway  line  is  the  salaries  of  its  station  agents.  Suppose 
one  of  Mr.  Brandeis'  efficiency  experts  should  go  to  a  country  railway 
station  and  study  the  movements  of  the  station  agent  throughout  the 
24  hours  of  the  day.     Suppose  he  could  show  kim  how  to  sell  tickets 


66  CURRENT   RAILWAY   PROBLEMS. 

It  is  not  only  in  shops  that  railway  employees  are  compara- 
tively inefficient,  and  demand,  and  often  get,  two  days'  pay  for 
one  day's  work.  One  of  the  reasons  why  the  locomotive  en- 
ginemen  employed  on  the  railways  west  of  Chicago  are 
threatening  to  strike  is  that  the  railway  managers  have  re- 
fused to  pay  substantially  twice  as  high  wages  to  engineers 
running  Mallet  engines  as  to  those  running  other  freight  en- 
gines. The  Mallets  have  been  introduced  to  effect  economies 
and  increase  efficiency.  Their  purpose  would  be  nullified  if  the 
wages  paid  to  employees  on  trains  where  they  are  used  were 
based  on  what  the  engines  do  instead  of  on  what  the  men  do. 
Making  speeches  or  introducing  evidence  before  the  Inter- 
state Commerce  Commission  will  never  make  it  practicable 
for  railways  to  get  a  dollar's  work  for  every  dollar  that  they 

with  one  hand,  while  he  made  out  freight  way  bills  with  the  other. 
We  doubt  very  much  whether  the  agent  would  be  any  happier  or  better 
contented  with  his  job  after  he  had  been  thoroughly  "efficientized" ; 
and  as  the  railway  must  have  a  whole  man  at  each  station,  and  cannot 
get  its  business  dene  with  5/16ths  or  27/32ds  or  any  other  fraction  of 
a  man,  there  is  no  place  that  we  can  see  where  any  saving  would 
result  in  the  railway  pay-roll. 

The  case  of  the  station  agent  at  a  country  station  is  not  exceptional 
but  typical  of  railway  service.  Take  another  very  large  class  of  railway 
servants — the  engineers  and  firemen  on  locomotives.  These  men  are 
already  performing  feats  of  efficiency  engineering  by  doing  several 
things  simultaneously,  such  as  watching  for  signals,  attending  to  in- 
jectors and  graduating  the  throttle.  There  is  no  chance  for  Mr.  Bran- 
deis's  efficiency  experts  to  save  anything  in  engine-runners  or  firemen's 
wages;  and,  as  for  teaching  the  one  how  to  handle  his  machine  more 
economically,  and  the  other  how  to  fire  coal  so  as  to  save  fuel  and 
prevent  smoke,  the  railways  already  have,  and  have  had  for  many  years, 
Traveling  Engineers  at  work  engaged  upon  this  very  task.  .  .  . 

It  is  not  a  new  idea,  either,  that  the  railways  might  operate  their 
repair  shops  more  economically.  As  a  matter  of  fact,  many  railway 
officers  have  for  years  been  working  on  the  problem  of .  introducing  in 
their  repair  shops  the  piece-work  system,  the  premium  system  and  other 
advanced  methods  of  paying  for  labor  on  the  basis  of  its  efficiency. 
Many  such  experiments  have  shown  good  results;  others  have  succeeded 
in  strangling  the  business^  with  red  tape,  and  the  resulting  saving  has 
appeared   on   the   wrong   side   of  the  ledger. 

We  agree  with  Mr.  Brandeis  that  the  end  of  economies  in^  railway 
operations  has  not  been  reached,  as  has  been  pointed  out  in  these 
columns  at  various  times,  nor  is  it  likely  to  be.  The  great  difficulty 
with  railway  operations  at  present  is  that  the  men  in  charge  are  so 
overburdened  with  routine  matters  that  they  have  as  a  rule  no  time  or 
energy  to  spare  for  the  study  of  new  means  and  methods  of  saving 
over  those  which  have  been  long  in  use. — From  editorial  in  Engineering 
News,  December  1,  1910. 


RAILWAY   RATES   AND  EFFICIE: 

pay  in  wages.  That  will  be  rendered  practicable — ^if  it^ 
either  by  appeals  to  the  good  sense  of  employees  or  by  the 
stern  arbitrament  of  strikes  and  lockouts. 

Government  regulation,  by  forcing  railway  executives  to 
apply  their  time,  thought  and  energies  to  protecting  rather 
than  to  improving  their  properties,  is  tending  strongly  to 
make  railway  operation  inefficient.  Railway  managers,  being 
human,  cannot  do  two  things  at  once.  The  more  thought  and 
energy  they  must  give  to  defending  the  roads,  the  less  they 
have  left  for  devising  methods  for  reducing  operating  ex- 
penses. As  the  Railway  Age  Gazette  has  said  before,  "not 
only  does  government  regulation  as  now  carried  on  hinder 
the  higher  officers  from  initiating  plans  for  improving  opera- 
tion, but  it  also  interferes  with  their  giving  adequate  consid- 
eration to  plans  worked  out  by  their  subordinates;  and,  of 
course,  the  important  schemes  of  subordinates  cannot  be  car- 
ried out  until  they  have  been  digested  and  approved  by  their 
superiors.  The  public  needs  to  be  reminded  that  for  whatever 
reduces  the  efficiency  or  increases  the  cost  of  railway  opera- 
tion it  must,  in  the  long  run,  foot  the  bill  in  the  passenger 
and  freight  rates  that  it  pays,  or  in  the  impaired  service  that 
it  will  receive,  or  in  both.  The  public  will  be  much  more  apt 
to  get  improved  service  at  reasonable  rates  if  it  gives  the 
railway  managers  a  chance  to  devote  more  time  to  the  ad- 
ministration of  their  properties  than  if  it  continues  to  compel 
them  to  give  so  much  of  their  time  to  the  defense  of  them." 

But,  after  all,  why,  on  the  shippers'  theory,  should  the  rail- 
way managers  be  interested  in  the  question  of  railway  effi- 
ciency? The  shippers  take  the  ground  that  the  railway  is 
entitled  to  a  fair  return  and  no  more,  and  that  the  railways 
of  the  United  States  as  a  whole  are  earning  a  fair  return  now. 
If  this  be  true,  what  object  can  railway  managers  have  in 
trying  to  increase  efficiency  of  operation?^     The  only  effect 

^  It  has  long  been  foreseen  that,  when  this  principle  is  established 
in  the  operation  of  any  public  utility,  a  large  part  of  the  incentive 
to  economical  and  efficient  operation  is  taken  away.  If  a  railway  com- 
pany saves  money  by  conducting  its  operations  with  especial  efficiency 


68  CURRENT   RAILWAY   PROBLEMS. 

would  be  to  increase  the  earnings  of  the  roads  above  a  fair 
return  and  to  invite  reductions  in  rates  and  earnings.  That 
would  benefit  the  shippers,  but  it  would  not  benefit  the  stock- 
holders of  the  railways;  and  the  railway  managers'  employ- 
ment, their  salaries  and  their  promotions  come  from  the 
stockholders.  The  application  of  the  "fair  return"  theory  to 
the  railway  business  would  be  the  surest  way  to  deaden  rail- 
way enterprise  and  prevent  the  economies  which  Mr.  Brandeis 
claims  could  be  made.  The  only  public  policy  which  will  tend 
to  promote  railway  efficiency  will  be  for  the  government  to 
say  in  effect  to  the  railways  that  they  must  not  charge  higher 
than  reasonable  rates  and  that  they  must  give  good  service, 
and  that  so  long  as  they  meet  these  requirements  they  will  be 
allowed  to  earn  profits  as  large  in  proportion  as  those  earned 
in  other  businesses.  The  only  incentive  that  has  ever  been 
effective  in  promoting  efficiency  in  the  management  of  con- 
cerns owned  by  private  capital  has  been  the  hope  and  prospect 
of  gain  to  the  owners ;  and  until  human  nature  is  revolu- 
tionized it  will  continue  to  be  the  only  effective  incentive. 

and  economy,  and  the  only  result  of  this  economy  is  to  bring  about 
a  reduction  in  the  rates  for  carrying  passengers  and  freight,  it  is  self- 
evident  that  a  chief  incentive  to  saving  is  removed.  Conversely,  a  rail- 
way may  be  so  mismanaged  that  money  will  be  wasted  in  any  one  of 
the  hundred  ways  by  which  a  railway's  expense  account  may  be  swollen. 
If  those  responsible  for  such  mismanagement  can  simply  raise  freight 
rates  so  that  the  net  earnings  will  be  maintained  notwithstanding  the 
increased  expense,  then  we  shall  not  only  see  an  end  to  economy  in 
the  railway  business  but  we  shall  open  a  wide  door  to  all  sorts  of 
extravagance  and  graft,  the  cost  of  which  will  fall  on  the  public. — 
From  editorial  in  Engineering  News,   December   1,   1910. 


THE  NEW  LONG  AND  SHORT  HAUL  LAW.^ 

The  railways  have  until  February  17,  1911,  to  decide  what 
they  are  going  to  do  about  the  new  long  and  short  haul 
section  of  the  Interstate  Commerce  act.  The  power  given  to 
the  Interstate  Commission  by  this  section  of  the  Mann-Elkins 
act  is  second  in  importance  among  the  powers  given  by  it 
only  to  that  conferring  on  the  commission  authority  to  re- 
strain advances  in  rates.  There  is  a  widespread  impression 
that  under  the  new  law  the  commission  can  and  probably 
will  rigorously  prohibit  railways  from  making  higher  rates 
for  shorter  than  for  longer  hauls  except  in  the  most  unusual 
circumstances.  It  is  desirable  that  this  impression  be  cor- 
rected. The  order  issued  by  the  commission  on  October  19, 
regarding  the  steps  to  be  taken  by  the  roads  toward  complying 
with  the  amended  long  and  short  haul  section,  gives  no  defi- 
nite indication  as  to  the  specific  policy  that  the  commission  in- 
tends to  pursue  in  administering  it,  but  it  does  seem  to  make 
plain  that  the  commission  will  not  try  to  enforce  this  section 
rigidly.  For  the  commission  to  try  to  do  so  would  be  to  dis- 
regard the  clear  intention  of  Congress,  for  a  bill  to  prohibit 
railways  from  in  any  case  charging  more  for  a  shorter  than 
for  a  longer  haul  was  introduced  at  the  last  session  and  de- 
feated. The  main  difference  between  the  section  finally 
adopted  and  that  in  the  original  Interstate  Commerce  act  is 
that  the  original  act  made  it  "unlawful  for  any  common  carrier 
...  to  charge  or  receive  any  greater  compensation  in  the 
aggregate  for  the  transportation  of  passengers  or  of  like 
kind  of  property,  under  substantially  similar  circumstances 
and  conditions,  for  a  shorter  than  for  a  longer  distance  over 
the  same  line";  while  the  amended  act  strikes  out  the  words 
under  substantially  similar  circumstances  and  conditions,  and 

^An    article   in   the   Railway  Age   Gazette t   November  25,  1910. 


70  CURRENT   RAILWAY   PROBLEMS. 

makes  clearer  the  intention  of  Congress  that  before  a  railway- 
may  charge  a  higher  rate  for  a  shorter  haul  it  must  get  the 
express  consent  of  the  commission.  Until  February  17  the 
roads  may  continue  to  make  rates  as  they  have  heretofore. 
After  that  they  must  not  charge  a  higher  rate  for  a  shorter 
haul  unless  they  first  get  the  explicit  authorization  of  the 
commission,  or  invalidate  the  law  by  litigation. 

While  negatively  it  is  clear  that  Congress  did  not  intend 
the  railways  to  be  absolutely  prohibited  from  charging  a 
higher  rate  for  a  shorter  haul,  it  is  not  clear  when  Congress 
meant  that  this  might  be  permitted.  There  was  a  strong  feel- 
ing that  the  existing  method  of  making  rates  was  wrong;  but 
as  to  just  what  ought  to  be  done  to  make  it  right  the  law- 
makers did  not  feel  entirely  sure,  so  they  turned  the  whole 
job  over  to  the  commission.  Under  the  old  law  some  guid- 
ance was  given  to  the  commission  by  the  words  "under  sub- 
stantially similar  circumstances  and  conditions."  They 
plainly  implied  that  where  circumstances  and  conditions 
were  substantially  dissimilar  a  higher  rate  for  a  shorter 
haul  might  properly  be  charged.  The  fact  that  these  words 
were  deliberately  stricken  out  by  the  Mann-Elkins  bill 
shows  that  some  substantially  dissimilar  circumstances  and 
conditions  which  the  courts  have  held  to  justify  non-observ- 
ance of  the  long  and  short  haul  principle  do  not  justify  it  in 
the  opinion  of  Congress.  But  under  just  what  circumstances 
the  long  and  short  haul  principle  may  be  disregarded  seems 
to  be  left  by  the  act,  if  the  fourth  section  be  read  alone,  to  be 
determined  entirely  by  the  commission. 

Most  railway  lawyers  do  not  believe,  however,  that  if  the 
question  is  ever  litigated  the  courts  will  hold  that  the  com- 
mission has  such  unlimited  discretion.  They  contend  that 
the  railway  has  a  property  right  in  the  beneficial  use  of  its 
property.  This  includes  the  right  to  make  any  rate  which  is 
not  unfairly  discriminatory  or  unreasonable.  They  argue  that 
there  are  certain  conditions  in  which  the  fixing  of  a  higher 
rate  for  a  shorter  haul  is  neither  unreasonable  nor  unfairly 


LONG  AND   SHORT  HAUL  LAW.  71 

discriminatory.  It  follows  that  the  right  of  a  railway  under 
such  conditions  to  charge  a  higher  rate  for  a  shorter  haul  is  a 
property  right  which  cannot  be  taken  away.  If  it  be  answered 
that  the  law  does  not  absolutely  take  this  right  away,  but  gives 
the  commission  discretion  to  determine  when  it  may  be  exer- 
cised, it  is  replied  that  this  does  not  cure  the  defect  in  the 
provision.  The  commission  is  an  administrative  body  of  dele- 
'  gated  powers.  Congress  cannot  confer  on  such  a  body  au- 
thority without  laying  down  the  rule  by  which  it  is  to  be 
guided  in  exercising  it;  and  the  new  long  and  short  haul  sec- 
tion gives  no  such  guidance. 

On  this  theory  the  law  cannot  be  upheld  as  constitutional 
unless  it  shall  be  read  as  a  whole,  and  it  shall  be  held  that  in 
some  other  part  of  it  Congress  has  laid  down  the  rule  which  is 
to  guide  the  commission.  It  is  contended  that  if  the  rule  is 
laid  down  anywhere  it  is  the  first  section,  which  requires 
rates  to  be  reasonable  for  the  service,  and  in  the  third 
section  which  prohibits  them  from  being  unfairly  dis- 
criminatory. Under  this  interpretation  a  railway  which 
desires  to  disregard  the  long  and  short  haul  principle  must 
first  apply  to  the  commission.  If  the  commission  de- 
nies its  application  the  road  may  appeal  to  the  courts  on 
the  ground  that  the  adjustment  of  rates  it  proposes  to 
make  would  not  be  unreasonable  or  unduly  discriminatory. 
And  if  the  court  finds  that  this  contention  is  true,  it 
will  nullify  the  commission's  ruling  just  as  in  previous 
years  it  nullified  its  orders  when  the  courts  differed  from  it 
as  to  whether  certain  circumstances  were  dissimilar  within 
the  intendment  of  the  original  Interstate  Commerce  act. 
On  this  theory  the  new  long  and  short  haul  section  differs 
from  the  corresponding  part  of  the  old  law  a  great  deal  as 
that  part  of  the  new  law  giving  the  commission  jurisdiction  of 
rates  in  general  differs  from  the  one  in  the  Hepburn  act. 
Under  the  Hepburn  act  the  commission  had  no  control  over 
the  initiation  of  rates.  It  could  act  with  reference  to  a  raise 
in  rates  only  after  the  raise  had  been  made.     Under  the  new 


72  CURRENT    RAILWAY    PROBLEMS. 

law  it  may  restrain  an  advance  until  it  has  determined 
whether  it  is  reasonable.  Similarly,  under  the  old  law  a  rail- 
way might  itself  determine  whether  particular  circumstances 
and  conditions  were  sufficiently  dissimilar  to  justify  departure 
from  the  long  and  short  haul  principle  and  make  rates  ac- 
cordingly, and  the  commission  could  not  interfere  with  them 
until  they  were  in  effect.  Under  the  new  law  the  railways  are 
prohibited  from  disregarding  the  long  and  short  haul  principle 
without  first  having  got  the  consent  of  the  commission;  the 
railway  cannot  make  an  unreasonable  or  discriminatory  ad- 
justment and  keep  it  in  effect  until  some  shipper  complains 
and  gets  it  changed. 

Some  lawyers  are  inclined  to  think  that  the  courts  may 
hold  that  Congress  did  give  the  commission  complete  discre- 
tion to  determine  whether  a  higher  rate  may  or  may  not  be 
made  for  a  shorter  haul,  and  that  its  action  in  doing  so  is 
constitutional.  The  decisions  of  the  Supreme  Court  of  the 
United  States  construing  the  long  and  short  haul  clause  of  the 
original  Interstate  Commerce  act  do  not  throw  much  light 
on  the  question;  for  practically  all,  if  not  all,  turned  on  the 
meaning  of  the  words  "substantially  similar  circumstances 
and  conditions,"  which  are  not  now  in  the  fourth  section.  But 
in  1901  the  Supreme  Court  rendered  a  decision  which  is  re- 
garded as  having  more  or  less  of  a  bearing  on  the  matter. 
This  was  in  the  case  of  the  Louisville  &  Nashville  vs.  Ken- 
tucky (183  U.  S.  503). 

The  constitution  of  Kentucky  contained  a  provision  identical 
with  the  long  and  short  haul  clause  of  the  original  Interstate 
Commerce  act,  and  the  Kentucky  legislature  passed  a  law 
to  give  effect  to  it.  The  state  railway  commission,  which  was 
created  by  the  state  constitution,  prohibited  the  railways  from 
in  any  case  disregarding  the  long  and  short  haul  principle 
without  its  express  consent.  The  Louisville  &  Nashville  dis- 
obeyed the  commission's  order  and  was  prosecuted.  It 
contended  that  the  Kentucky  law  was  unconstitutional  on 
much  the  same  grounds  on  which  it  is  now  contended  that 


LONG  AND   SHORT  HAUL  LAW.  73 

the  new  federal  long  and  short  haul  law  is  unconstitutional. 
The  Supreme  Court  of  the  United  States  decided  against  the 
railway. 

There  are  several  important  points,  however,  in  which  this 
case  differed  from  any  that  could  arise  under  the  Interstate 
Commerce  act.  The  Kentucky  commission  was  created  by  the 
state  constitution,  while  the  Interstate  Commerce  Commission 
exercises  only  powers  delegated  to  it  by  Congress.  The  long 
and  short  haul  clause  was  in  the  Kentucky  constitution,  while 
the  federal  long  and  short  haul  clause  is  merely  an  enactment 
of  Congress.  The  Kentucky  law  and  the  action  of  the  com- 
mission administering  it  had  been  upheld  by  the  Kentucky 
supreme  court,  and  it  is  a  familiar  principle  that  the  federal 
courts  will  uphold  the  interpretation  put  by  a  state  court  on  a 
state  law  or  constitution  if  this  can  be  done  without  violating 
some  provision  of  the  federal  constitution.  The  Kentucky 
constitution  and  the  law  passed  to  give  effect  to  it  laid  down 
a  rule  for  the  commission  to  follow,  by  indicating  that  the 
long  and  short  haul  principle  might  be  departed  from  where 
conditions  were  substantially  dissimilar,  while  the  present 
federal  law  does  not  lay  down  any  such  rule.  It  would  seem 
that  the  only  question  on  which  the  Kentucky  case  might  be 
a  precedent  for  a  case  arising  under  the  existing  federal  law 
would  be  whether  a  law  or  an  order  of  a  commission  which 
absolutely  prohibits  the  charging  of  a  higher  rate  for  a  shorter 
haul  deprives  a  railway  of  its  right  of  property  to  make 
reasonable  rates.  This  question  was  directly  raised  in  the 
Kentucky  case,  and  the  federal  Supreme  Court  said : 

"Though  it  be  conceded  that  ownership  in  a  railway  is 
property,  it  is  property  of  a  kind  that  is  subject  to  the  regula- 
tions prescribed  by  the  state.  We  do  not  wish  to  be  under- 
stood as  intimating  that  if,  hereafter,  the  railroad  commission 
should  fix  and  establish  rates  of  a  confiscatory  character,  the 
company  would  be  without  the  protection  which  courts  of 
equity  have  heretofore  given  in  cases  of  that  description. 
What   we   now   say  is   that  a   state   corporation   voluntarily 


74  CURRENT    RAILWAY    PROBLEMS. 

formed  cannot  exempt  itself  from  the  control  reserved  to 
itself  by  the  state  by  its  constitution,  and  that  the  plaintiff  in 
error,  if  not  protected  by  a  valid  contract,  cannot  successfully 
invoke^  the  interposition  of  the  federal  courts,  in  respect  to 
the  long  and  short  haul  clause  in  the  state  constitution,  on  the 
ground,  simply  that  the  railroad  is  property."  183  U.  S. 
503,  513. 

In  other  parts  of  its  decision  the  court  repeatedly  indi- 
cated that  it  based  its  decision  "upon  the  proposition  that 
the  company  takes  and  holds  its  franchise  and  property  sub- 
ject to  the  conditions  and  limitations  imposed  by  the  state  in 
its  constitution."  Now,  of  course,  the  same  thing  could  not 
be  said  of  any  railway  which  contested  the  constitutionality 
of  the  federal  long  and  short  haul  law,  because  no  road  has 
taken  and  holds  its  franchise  and  property  subject  to  any  such 
federal  constitutional  conditions  and  limitations. 

In  view  of  all  these  circumstances  it  seems  improbable  that 
the  Kentucky  case  can  be  considered  a  precedent  indicating 
what  the  Supreme  Court  will  decide  regarding  the  consti- 
tutionality of  the  new  federal  long  and  short  haul  clause.  Of 
course,  if  it  is  a  precedent,  it  indicates  that  the  court  will 
uphold  the  law.  But  A.  P.  Thom,  general  counsel  of  the 
Southern  Railway,  undoubtedly  expressed  the  consensus  of 
legal  opinion  when,  at  the  hearing  before  the  Interstate  Com- 
merce Commission  on  October  8,  he  contended  that  either  the 
amended  fourth  section  must  be  construed  merely  to  give  the 
commission  the  initiative  to  permit  making  of  rates  that 
are  not  unreasonable  or  unfairly  discriminatory,  or  it  must 
be  held  unconstitutional. 

Probably,  sooner  or  later  the  question  of  the  constitution- 
ality of  the  new  long  and  short  haul  law  will  be  fought  out 
in  the  courts.  Meantime,  the  disposition  of  most  railway 
legal  and  traffic  officers  is  to  try  to  work  out  and  agree  with 
the  commission  on  some  adjustment  of  rates  which  will  make 
possible  the  avoidance  of  litigation.  Heretofore  there  have 
been   some  violations   of  the   long   and   short  haul   principle 


LONG  AND  SHORT  HAUL  LAW.  75 

which  cannot  be  defended  on  sound  economic  or  ethical 
grounds,  and  there  have  been  others  which  are  defensible  on 
these  grounds  but  which  seem  so  indefensible  to  the  general 
public  that  in  the  long  run  the  roads  might  gain  by  eliminating 
them  from  their  tariffs.  If,  therefore,  the  commission  does 
not  lay  down  rules  which  seem  to  the  railway  officers  alto- 
gether too  drastic,  there  is  ground  to  hope  that  some  adjust- 
ment which  will  be  reasonably  satisfactory  will  be  reached 
without  litigation. 

The  cases  where  higher  rates  have  been  made  for  shorter 
than  for  longer  hauls  present  the  most  infinite  variety. 
The  Supreme  Court,  in  its  opinion  in  the  case  of  East  Ten- 
nessee, Virginia  &  Georgia  et  al.  vs.  Interstate  Commerce 
Commission  (181  U.  S.  1,  20),  suggested  a  case  where  disre- 
gard of  the  long  and  short  haul  principle  would  be  plainly 
unfair. 

"Take  a  case,"  said  the  court,  "where  the  carrier  cannot 
meet  the  competitive  rate  to  a  given  point  without  transport- 
ing the  merchandise  at  less  than  the  cost  of  transportation, 
and  therefore  without  bringing  about  a  deficiency  which  would 
have  to  be  met  by  increased  charges  upon  other  business. 
Clearly,  in  such  a  case,  the  engaging  in  such  competitive 
traffic  would  both  bring  about  an  unjust  discrimination  and  a 
disregard  of  the  public  interest,  since  a  tendency  towards 
unreasonable  rates  on  other  business  would  arise  from  the 
carriage  of  traffic  at  less  than  the  cost  of  transportation  to 
the  particular  places." 

As  there  are  some  examples  of  disregard  of  the  long  and 
short  haul  principle  that  are  plainly  indefensible,  so  there  are 
many  which  are  conclusively  defensible.  The  best,  of  course, 
are  those  where  railways  meet  active  and  controlling  water 
competition  at  more  distant  points  which  they  do  not  meet  at 
intermediate  points.  The  commission,  even  in  its  early  at- 
tempts to  administer  the  original  Interstate  Commerce  act, 
never  held  that  where  water  competition  was  active  and  con- 
trolling a  lower  rate  might  not  be  charged  for  a  longer  haul, 


76  CURRENT   RAILWAY   PROBLEMS. 

although  it  did  differ  from  the  roads  about  whether  they  could 
thus  fix  rates  without  its  previous  consent.  The  best  exam- 
ples of  lower  rates  for  longer  hauls  made  to  meet  water 
competition  are  found  in  the  southeast  and  on  the  Pacific 
coast.  There  has  been  nothing  said  or  done  to  indicate 
that  the  commission  will  refuse  to  let  the  roads  make  lower 
rates  from  New  York  to  San  Francisco,  for  instance,  or  from 
New  York  to  New  Orleans,  than  to  intermediate  points.  The 
law  as  it  now  stands  not  only  gives  the  commission  authority 
to  say  whether  a  lower  rate  may  be  made  for  a  shorter  haul, 
but  also  authorizes  it  "from  time  to  time  to  prescribe  the 
extent  to  which  such  designated  common  carrier  may  he 
relieved  from  the  operation  of  this  section."  The  theory  on 
which  the  railways  have  acted  in  the  past  has  been  that  where 
water  competition  was  controlling  they  could  make  any  dif- 
ference between  the  water  rates  and  the  rates  for  the  longer 
and  the  shorter  hauls  that  they  liked  so  long  as  the  rate  for  the 
longer  haul  was  not  positively  unremunerative  and  the  rate 
for  the  shorter  haul  was  not  excessive.  It  is  evident,  how- 
ever, that  the  commission  now  has — whether  it  had  before  or 
not — the  authority  to  limit  the  amount  of  the  discrimination 
which  may  be  made  between  the  intermediate  and  the  more 
distant  points. 

Of  course,  the  defense  advanced  for  the  distinction  made 
between  the  more  distant  and  the  intermediate  points  in  cases 
such  as  this  is  that  the  railways  do  not  make  the  rates  to  the 
more  distant  points.  The  water  lines  make  them.  They 
must  meet  the  rates  fixed  by  the  water  lines  or  go  out  of 
business  at  the  more  distant  points.  But  because  competition 
forces  them  to  accept  a  lower  rate  to  the  more  distant  point 
than  they  otherwise  would  is  no  reason  why  they  should  be 
prevented  from  charging  a  reasonable  rate,  even  though  a 
higher  one,  to  the  intermediate  point.  They  could  not  afford 
to  make  rates  as  low  in  proportion  on  all  of  their  lines  as 
they  make  to  meet  water  competition.  If  they  were  required 
to  do  this  they  would  have  in  many  cases  to  refrain  from 


LONG  AND   SHORT  HAUL  LAW.  11 

meeting  water  competition.  The  result  would  be  that  they 
would  lose  any  profit  that  they  make  by  hauling  traffic  to  the 
more  distant  point,  and,  in  order  to  earn  a  fair  return,  they 
might  have  to  raise  their  rates  to  the  intermediate  points; 
in  any  event,  the  enforcement  of  a  rigid  long  and  short  haul 
rule  would  be  of  no  benefit  to  many  intermediate  points. 

One  fact  very  commonly  overlooked  is  that  the  railways 
of  the  United  States  do  not  encounter  water  competition 
from  river  and  coastwise  water  lines  alone.  Ocean  steam- 
ships carry  a  large  amount  of  grain  from  the  Pacific  coast 
around  Cape  Horn  to  Europe.  There  are  times  on  the  return 
trip  when  they  can  hardly  get  enough  traffic  for  ballast.  In 
consequence,  they  make  very  low  rates  from  Europe  to  the 
Pacific  coast  on  many  bulky  commodities.  One  of  these  is 
cement,  which  they  carry  in  large  quantities  from  Belgium. 
To  meet  this  competition  the  railways  make  a  very  substan- 
tially lower  rate  on  cement  shipped  from  Hannibal,  Mo.,  and 
Buffington,  111.,  to  the  Pacific  coast  than  to  intermediate 
points.  They  could  not  make  their  present  coast  rates  their 
maxima.  If  they  were  required  to  do  so  they  would  simply 
quit  hauling  cement  to  the  coast  and  the  Belgian  producer 
would  get  all  the  business. 

A  good  example  of  lower  rates  for  longer  hauls  made  to 
meet  both  rail  and  water  competition  that  really  covers  the 
entire  earth  is  afforded  by  the  rates  on  grain  and  its  products. 
Flour  shipped  from  the  United  States  to  Liverpool  meets 
there  the  competition  of  wheat  and  flour  hauled  there  by  rail 
and  water  from  Canada,  Russia  and  Argentine.  It  must  be 
laid  down  there  at  a  freight  rate  which  will  enable  it  to  be 
sold  at  a  profit.  To  enable  the  American  producer  to  meet 
the  competition  in  the  markets  of  the  world  the  rate  on  flour 
for  export  from  Minneapolis  to  New  York  is  made  21^ 
cents,  while  the  rate  to  interior  points  is  higher — to  Paterson, 
N.  J.,  for  instance,  it  is  25  cents. 

Still  another  example  of  the  same  kind  is  afforded  by  the 
rates  made  by  the  Chicago,  Milwaukee   &  St.  Paul  on  cotton 


78  CURRENT   RAILWAY   PROBLEMS. 

piece  goods  moving  to  the  Orient.  The  rates  from  different 
places  vary,  but,  generally  speaking,  it  may  be  said  that  the 
rate  from  points  in  the  Southeast  to  Spokane  is  $2.50;  to  the 
Pacific  coast,  $L32,  and  that  the  proportion  of  the  through 
rate  received  by  the  St.  Paul  and  its  connections  on  cotton 
piece  goods  moving  from  the  Southeast  to  the  Orient  is  94 
cents.  The  reason  why  the  lower  proportional  rate  is  made 
on  goods  moving  to  the  Orient  is  that  these  goods  may  move 
either  westward  through  the  United  States  and  across  the 
Pacific  ocean,  or  eastward  over  the  Atlantic  ocean  and 
through  the  Suez  canal  to  the  Orient.  The  other  trans- 
continental railways  formerly  made  lower  proportional  rates 
on  goods  moving  to  the  Orient  than  to  the  coast,  but  when 
they  were  required  to  publish  the  inland  proportions  of  these 
rates  they  raised  them  to  the  same  basis  as  the  Pacific  coast 
rates,  rather  than  disclose  to  the  public  what  revenue  they 
had  been  getting  from  Oriental  business.  The  St.  Paul  has 
been  able  to  get  a  good  deal  of  this  business  since  it  became 
a  transcontinental  line. 

On  economic  grounds  the  justification  for  making  lower 
rates  for  longer  hauls  when,  as  in  these  cases,  it  is  absolutely 
necessary  in  order  to  meet  competition  not  only  with  coast- 
wise steamships  but  with  ocean  steamships  moving  over  all 
the  waters  of  the  earth,  seems  complete.  The  German  state 
railways  and  other  railways  of  Europe  also  make  lower  rates 
on  export  than  on  domestic  business.  Nevertheless,  the 
course  of  the  railways  of  the  United  States  in  thus  making 
rates  has  been  the  object  of  bitter  criticism.  It  is  an  inter- 
esting question  to  what  extent  some  of  the  roads  will  con- 
tinue to  make  rates  in  this  way,  even  if  they  get  the  consent 
of  the  commission — and  if  not  its  consent,  that  of  the  courts — 
to  do  so.  The  western  transcontinental  lines  are  confronted 
by  the  fact  that  in  a  few  years  the  Panama  canal  will  be 
done  and  that  then  the  coastwise  steamships  can  make  much 
lower  rates  between  the  Atlantic  and  Pacific  coasts  than  now. 
Furthermore,  it  is  doubtful  if  the  bitter  sentiment  the  exist- 


LONG  AND  SHORT  HAUL  LAW.  79 

ing  rate  adjustment  has  excited  against  the  roads  can  ever  be 
changed  except  by  a  change  in  the  method  of  making  rates. 
The  Interstate  Commerce  Commission  in  the  various  Pacific 
coast  rate  cases  has  held  that  the  rates  of  the  railways  to 
intermediate  points  are  unreasonable  per  se.  Furthermore, 
as  the  Panama  canal  soon  will  be  finished,  it  seems  to  some 
railway  officers  desirable  that  any  discriminating  done  in 
future  should  be  in  favor  of  the  interior  country,  since  the 
railways  will  always  get  all  of  the  traffic  there,  while  they  are 
apt  to  have  to  fight  harder  and  to  make  lower  rates  for  the 
coast  traffic.  In  these  circumstances,  it  seems  worthy  of  con- 
sideration whether  the  roads  would  not  gain  in  the  long  run 
by  raising  their  rates  to  the  coast  to  a  basis  where  they  would 
be  reasonable  regardless  of  water  competition.  With  rates 
made  on  this  basis  they  would  be  able  to  get  some  traffic 
from  the  Eastern  seaboard  to  the  coast,  for  some  traffic  will 
seek  the  railway  rather  than  the  waterway  even  though  the 
railway  rate  is  much  higher.  On  the  other  hand,  there  is  no 
doubt  that  if  the  railways  raised  their  coast  rates  they  would 
lose  a  very  large  part  of  their  traffic  from  the  Eastern  sea- 
board to  the  coast.  But  some  railway  officers  are  a  little  in- 
clined to  think  that  what  they  would  lose  in  this  way  would 
be  less  than  they  will  lose  in  the  long  run  by  continuing  to 
make  extremely  low  rates  to  the  coast,  which  may  be  invidi- 
ously compared  with  their  relatively  higher  rates  to  the 
interior. 

As  is  well  known,  the  rates  of  the  roads  to  the  coast  have 
been  blanketed  from  the  Eastern  seaboard  back  to  the  Mis- 
souri river.  In  other  words,  lower  rates  have  been  made 
from  Chicago,  for  example,  to  the  coast  than  to  intermediate 
points  as  well  as  from  New  York.  This  has  been  done  to 
enable  manufacturers  and  jobbers  in  the  Middle  West  to 
compete  with  Eastern  manufacturers  and  jobbers,  for  business 
on  the  Pacific  coast.  In  other  words,  it  has  been  due  to  com- 
mercial competition.  The  Interstate  Commerce  Commission 
has  pretty  clearly  indicated  to  the  railway  officers  that  the 


80  CURRENT   RAILWAY   PROBLEMS. 

commission  would  not  approve  of  the  continuance  of  this 
method  of  rate-making,  and  has  intimated  that  Chicago 
should  be  used  as  a  dividing  line  and  that,  while  from  points 
east  of  it  rates  may  continue  to  be  made  lower  to  the  coast 
than  to  intermediate  points,  from  Chicago  and  points  west 
of  it  the  railways  must  desist  from  making  lower  rates  to 
the  coast  than  to  the  interior.  To  draw  the  dividing  line  at 
Chicago  would  be  rather  arbitrary.  Starch  now  moves  in 
considerable  quantities  from  Keokuk,  Iowa,  which  is  west  of 
Chicago,  to  the  Atlantic  and  thence  by  boat  to  the  Pacific 
coast.  South  Bend,  Ind.,  is  only  a  short  distance  east  of  Chi- 
cago, and  yet  when  the  transcontinental  lines  a  short  time 
ago  raised  the  rate  on  wagons  from  South  Bend  to  the  Pa- 
cific coast  from  $L25  to  $L35  they  found  this  change  was 
sufficient  to  cause  the  traffic  to  begin  to  move  to  the  Atlantic 
and  thence  by  boat  to  the  Pacific  coast.  In  consequence,  they 
restored  the  old  rate.  But,  no  doubt,  the  commission  feels 
that  if  a  line  is  to  be  drawn  at  all  it  must  be  drawn  arbitrarily, 
and  that  Chicago  is  as  good  a  place  to  draw  it  as  anywhere. 
If  this  is  done  the  rates  from  Chicago  to  the  coast  will  have 
to  be  made  the  maxima  to  intermediate  points.  This  would 
make  it  necessary  for  the  roads  to  reduce  all  of  their  rates 
to  intermediate  points  to  the  basis  of  their  present  coast 
rates,  for  the  commission  has  held  that  any  higher  rates  to 
Spokane  from  the  East  than  those  now  made  to  the  coast  are 
unreasonable.  On  the  other  hand,  it  would  not  prevent  the 
roads  from  raising  their  rates  to  the  coast.  If  they  reduced 
their  rates  to  the  interior  and  at  the  same  time  raised  their 
rates  to  the  coast  they  would  suffer  for  some  time  a  very 
heavy  reduction  in  revenue  from  both  their  interior  and  their 
coast  traffic,  which  would  have  to  be  made  good — ^if  it  ever 
were  made  good — by  an  increase  in  the  traffic  to  the  interior. 
The  difficulties  which  the  southeastern  lines  would  meet  in 
complying  with  a  rigid  long  and  short  haul  rule  are  perhaps 
even  greater  than  those  which  would  be  met  by  the  trans- 
continental lines.     Not  only  are  the  southeastern  states  com- 


LONG  AND   SHORT  HAUL  LAW.  81 

pletely  bounded  on  the  east  and  south  by  the  Atlantic  ocean 
and  the  gulf  of  Mexico,  but  there  are  many  navigable  rivers 
running  from  the  ocean  and  the  gulf  into  the  interior.  The 
roads  have  been  able  heretofore  to  hold  their  own  against 
the  waterways  because  they  have  been  permitted  to  make 
lower  rates  where  they  have  met  water  competition  than 
where  they  have  not.  In  its  earlier  decisions — for  example, 
in  the  case  of  Board  of  Trade  of  Troy,  Ala.,  vs.  Alabama 
Midland — the  commission  held  that  water  competition  which 
was  merely  potential  did  not  justify  disregard  of  the  long  and 
short  haul  principle.  If  the  commission  should  so  rule  now 
and  the  courts  should  uphold  it,  the  southeastern  lines  would 
have  to  choose  whether  they  would  reduce  all  their  inter- 
mediate rates  or  raise  their  rates  to  the  more  distant  points. 
If  they  adopted  the  former  alternative,  their  revenues  from 
their  local  business  would  be  heavily  reduced.  If  they 
adopted  the  latter  alternative  they  would  at  once  attract  water 
competition.  The  water  competition  might  then  become 
active  and  controlling,  in  which  event,  under  the  old  ruling 
of  the  commission,  the  roads  would  be  justified  in  reducing 
their  longer  haul  rates  once  more.  If  by  this  reduction  they 
succeeded  in  destroying  the  water  competition  once  more  they 
would  be  placed  in  a  peculiar  predicament,  for  the  Mann- 
Elkins  act  put  into  the  Interstate  Commerce  act  an  entirely 
new  provision  regarding  water  competition.  This  appears  in 
section  four,  and  is  as  follows : 

"Whenever  a  carrier  by  railroad  shall  in  competition  with 
a  water  route  or  routes  reduce  the  rates  on  the  carriage  of 
any  species  of  freight  to  or  from  competitive  points,  it  shall 
not  be  permitted  to  increase  such  rates  unless  after  hearing 
by  the  Interstate  Commerce  Commission  it  shall  be  found 
that  such  proposed  increase  rests  upon  changed  conditions 
other  than  the  elimination  of  water  competition." 

Now,  the  water  competition  having  ceased  to  be  active,  it 
would  seem  that  under  the  rule  laid  down  by  the  commission 
in  its  earlier  decisions  the  roads  would  have  to  quit  making 


82  CURRENT   RAILWAY   PROBLEMS. 

lower  rates  for  the  longer  hauls.  But  they  could  not  raise 
rates  which  had  been  made  to  meet  water  competition  with- 
out proving  that  there  had  been  some  change  in  the  condi- 
tions besides  the  elimination  of  water  competition.  It  would 
seem  that  in  that  event  if  the  commission  stuck  to  its  old 
rule,  and  the  law  were  not  modified,  the  southeastern  rail- 
ways would  have  no  alternative  but  to  reduce  all  of  their 
intermediate  rates.  It  will  be  recalled  that  the  Supreme 
Court  in  its  decision  construing  the  original  Interstate  Com- 
merce act  overruled  the  commission,  and  held  that  where 
water  competition  actually  had  existed  and  would  revive  if 
railway  rates  were  raised  there  existed  a  dissimilarity  of 
circumstances  and  conditions  which  authorized  the  railway 
to  make  a  lower  rate  for  the  longer  haul.  In  view  of  these 
decisions  of  the  courts  and  the  changed  personnel  and  greater 
experience  of  the  commission,  it  seems  not  improbable  that 
the  commission  may  hold  in  construing  the  Mann-Elkins  act 
that  where  potential  water  competition  exists  it  justifies  a 
lower  rate  for  a  longer  haul,  although  it  is  easily  conceivable 
that  it  may  rule  now  as  it  did  originally.  In  that  event  there 
would  most  certainly  be  litigation  with  the  railways  in  the 
southeast,  as  their  traffic  is  still  so  light  that  they  could  not 
stand  very  heavy  reductions  in  their  earnings. 

In  addition  to  effective  and  controlling  water  competition, 
it  has  been  generally  recognized  that  where  one  of  two  rail- 
ways running  between  competitive  points  has  a  substantially 
/onger  line  than  the  other,  it  is  justified  in  meeting  the  rates 
made  by  the  shorter  line  between  the  competitive  points, 
while  charging  higher  r^tes  to  intermediate  points.  The  de- 
fense of  the  practice  is  the  same  in  this  case  as  where  a  rail- 
way meets  controlling  water  competition  at  one  point  which 
it  does  not  meet  at  another  point.  The  only  place,  it  is  be- 
lieved, where  the  long  and  short  haul  rule  has  been  consist- 
ently and  rigidly  enforced  is  in  Iowa.  The  popular  notion 
is  that  where  this  is  done  all  of  the  intermediate  rates  will 
be  reduced  so  that  they  will  be  no  higher  than  the  rate  via 


LONG  AND   SHORT  HAUL  LAW.  83 

the  long  line  for  the  longest  haul.  This  has  not  been  the 
result  in  Iowa.  In  that  state  the  longer  line  between  any 
two  points,  in  preference  to  decreasing  its  earnings  by  reduc- 
ing its  intermediate  rates,  has  usually  refrained  from  meeting 
the  rate  of  the  shorter  line  to  the  competitive  point.  The 
efifect  has  been  to  keep  the  longer  line  from  getting  any 
profit  that  it  might  have  derived  from  the  competitive  busi- 
ness and  to  deprive  the  people  at  the  points  where  there  are 
more  than  one  road  from  getting  any  of  the  benefits  of  com- 
petition. Who  benefits  and  who  is  hurt  by  this  policy  depends 
mainly  on  how  much  difference  there  is  between  the  lengths 
of  the  competing  roads.  In  many  cases  a  road  which  is 
longer  than  a  competing  line  between  two  points  is  shorter 
than  the  same  line  between  two  other  points,  and  what  it  loses 
by  not  competing  between  the  two  former  places  it  gains  by 
its  competitor  refraining  from  competing  between  the  two 
latter.  But  it  seldom  happens  that  the  advantages  and  dis- 
advantages of  a  road  balance  each  other.  There  are  some 
roads  which  are  the  short  lines  between  most  competing 
points  and  other  roads  which  are  the  long  lines  between  most 
competing  points.  Obviously,  in  these  circumstances,  rigid 
enforcement  of  the  long  and  short  haul  rule  will  benefit  the 
former  and  the  shippers  living  on  them  and  injure  the  latter 
and  the  shippers  living  on  them,  for  the  long  line,  being 
unable  in  many  cases  to  make  rates  to  the  competitive  points, 
must  get  its  revenue  mainly  from  its  local  traffic,  which  in- 
volves the  necessity  of  making  high  rates  on  this  traffic. 
Whether  a  long  line  will,  where  the  long  and  short  haul  rule 
is  rigidly  enforced,  meet  the  rates  of  the  short  line  at  com- 
petitive points  and  reduce  its  local  rates,  or  will  refrain  from 
meeting  competition  and  keep  up  its  local  rates,  depends 
largely  on  the  relative  amounts  of  the  local  and  the  competi- 
tive traffic.  If  the  terminal  points  are  large  cities,  such  as 
Kansas  City  and  Chicago,  or  St.  Paul  and  Chicago,  it  prob- 
ably will  prefer  to  stay  in  the  competitive  business  and  reduce 
its  local  rates.     On  the  other  hand,  where,  as  in  Iowa,  there 


84      CURRENT  RAILWAY  PROBLEMS. 

is  no  very  great  difference  between  the  sizes  of  the  various 
cities,  the  opposite  policy  is  apt  to  be  adopted. 

While  railways  under  the  conditions  existing  in  Iowa  may 
submit  without  a  determined  contest  in  the  courts  to  the  en- 
forcement of  a  rigid  long  and  short  haul  rule,  because  the 
amount  that  they  lose  by  it  is  relatively  small,  it  seems  incon- 
ceivable that  they  would  do  so  where  the  amount  involved 
was  very  large.  For  example,  the  Chicago  &  North  Western 
and  the  Harriman  lines  between  Chicago  and  Spokane  are 
much  longer  than  the  Hill  lines.  For  the  former  either  to 
make  their  rates  to  Spokane  their  maxima  to  intermediate 
points  or  to  quit  meeting  the  competitive  rates  to  Spokane 
would  involve  loss  of  a  large  amount  of  revenue;  and  it  is 
not  conceivable  that  in  such  circumstances  railways  would 
submit  to  enforcement  of  the  long  and  short  haul  rule  with- 
out a  stubborn  legal  contest.  It  is  worth  noting  in  this  con- 
nection, also,  that  while,  where  the  amount  that  a  railway 
will  lose  by  applying  the  long  and  short  haul  rule  is  small, 
the  courts  might  not  hold  that  enforcement  of  it  was  uncon- 
stitutional, enforcement  of  it  which  would  involve  the  loss 
of  a  large  amount  of  revenue  might  be  held  confiscatory  of 
the  property  of  the  longer  line. 

The  main  prerequisite  to  a  satisfactory  settlement  of  the 
long  and  short  haul  question — as  well  as  of  all  other  impor- 
tant railway  questions — is  that  the  public  shall  get  the  rail- 
way's point  of  view,  and  the  railways  the  public's  point  of 
view.  Persons  without  any  special  knowledge  of  railway 
affairs  who  discuss  violations  of  the  long  and  short  haul 
principle  usually  talk  as  though  they  think  the  discriminations 
railway  managers  make  between  communities  are  willful  and 
malicious.  A  little  thinking  would  convince  them  this  is  not 
true.  The  railway  manager  is  equally  interested  in  the  devel- 
opment of  all  the  communities  along  his  lines,  and  he  nat- 
urally would  rather  get  the  same  or  a  higher  rate  for  a  longer 
as  for  a  shorter  haul,  simply  because  the  longer  haul  costs 
more,  and  because  the  practice  of  charging  lower  rates  for 


LONG  AND  SHORT  HAUL  LAW.  85 

longer  hauls  excites  public  discontent.  It  ought  to  be  clear, 
therefore,  that  when  a  lower  rate  is  made  for  a  longer  haul 
there  must  be  conditions  beyond  the  control  of  the  traffic 
manager  which  prompt,  or  even  compel,  him  to  do  so,  and 
the  public  ought  to  study  and  understand  these  conditions 
before  in  any  given  case  it  condemns  this  method  of  rate- 
making. 

On  the  other  hand,  it  is  daily  becoming  clearer  that  rail- 
ways cannot  be  managed  solely  according  to  the  principles 
which  their  managers  believe  to  be  right.  Railway  managers 
ought  to  do  all  that  they  can  to  educate  public  sentiment,  so 
that  the  public  will  be  able  to  form  a  fair  and  intelligent 
opinion  of  the  effect  on  the  public  interest  of  the  policies 
followed  by  the  roads.  Where  laws  are  passed  which  wan- 
tonly attack  the  constitutional  rights  of  the  railways  they  are, 
no  doubt,  justified  in  litigating  them.  But  if  satisfactory  rela- 
tions are  ever  to  be  established  between  the  railways  and  the 
public,  the  railway  managements  must  recognize  the  fact  that 
some  things  which  it  would  be  right  and  desirable  for  them 
to  do  if  the  public  could  be  made  to  see  that  they  are  right 
and  desirable  may  become  wrong  from  the  railway  and  the 
public  standpoint  when  the  public  persistently  and  uncompro- 
misingly condemns  them.  There  are  many  discriminations 
in  rates  which  railway  men  believe  operate  to  the  public  good 
but  which  the  public — often  ignorantly — condemns.  If  the 
public  cannot  be  convinced  that  such  discriminations  are  right, 
it  may  be  better  to  desist  from  making  some  of  them,  pro- 
vided the  railway  can  do  so  without  reducing  its  profits  below 
a  fair  return.  The  result  of  antagonizing  public  sentiment  in 
regard  to  some  matters  of  this  kind  is  to  provoke  attacks  on 
the  railways  which  may  in  the  long  run  cause  them  and  the 
public  more  loss  than  the  railways  and  the  public  would  suffer 
from  the  railways  coihplyj;!^  with  some 'qf>  the  public's  unrea- 
sonable demands.        \/  '/'»  i    V  »         '»'  * 


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